Supply Chain Management

CHAPTER 2
SUPPLY CHAIN MANAGEMENT

AND LOGISTICS
INTRODUCTION
Generally, logistics refers to activities performed within a single organization, whereas
SC refers to a network of companies that coordinate their actions and work together
to market a product. In traditional logistics, procurement, distribution, maintenance, and
inventory management are also included. In addition to traditional logistics, supply chain
management (SCM) also encompasses marketing, new product development, finance,
and customer service activities. Logistics are one of the activities in SCM. A variety
of activities are involved in SCM, including production and inventory planning, labor
scheduling, material, and asset management, manufacturing, and delivering products and
services, and ensuring efficient and cost-effective delivery. Management of the supply
chain is concerned with the process of moving raw materials from the supplier to the
producer to the warehouse to the retailer or customer.
Learning Objectives
After completing this chapter, you will be able to understand:
• Basic fundamentals of logistics
• Logistics planning process
• Business objectives of logistics systems
• Evolution of logistics and SCM
50 Essentials of Supply Chain Management
Key Terms
• Public sector management
• Marketing management
• Marketing logistics
• Production line
• Inventory control
• Information monitoring
• Management information system
• Human resources
• Logistics channel decision
• Transportation cost
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Supply Chain Management and Logistics 51
2.1. BASIC FUNDAMENTALS OF LOGISTICS

In logistics, goods, services, and related information are flowed and
stored efficiently, effectively, and in an efficient manner to meet
customer needs from the point of origin to the point of consumption.
Logistics is a concept that has been practiced in trade since the
dawn of civilization: it is hardly new. This definition clearly illustrates
that logistics is about delivering products and services where they
are needed, whenever they are desired. In corporate and public
sectors, implementing best practices in logistics has become one
of the most challenging and exciting operational areas. As unique
as logistics is, it never stops! Logistics is conducted all over the
world, 24 hours a day, seven days a week, and 52 weeks a year.
Few business areas are as complex as logistics or encompass
the geography typical of logistics. The word logistics derives from
the French word ‘loger,’ meaning the art of war in relation to the
movement and supply of armies.
Basically a military concept, it is now commonly applied to
marketing management. Waging a war requires setting a goal, and
achieving that goal requires careful planning so that troops are
properly deployed and the supply line, which consists of weapons,
food, medical aid, etc., among other things, is maintained. Likewise,
the plan should be such that there is minimal loss of people and
material, while at the same time being able to be changed if the
need arises. Like a war on the battlefield, the marketing executives
also need an appropriate logistic facility capable of meeting the KEYWORD
corporate goal of profitably meeting the demand of the target
customers. Physical
distribution is
Basically, marketing logistics or physical distribution refers to the movement of
the process of planning, implementing, and controlling the flow goods, products,
and raw materials
of materials and finished products from the point of origin to the between warehouses,
point of use in order to satisfy customers profitably. The concept factories, and
refers to the management of the flow of raw materials and finished distribution centers,
goods from suppliers to consumers. and sending finished
products to the
This means managing goods efficiently from the end of the SC customer.
to the consumer, and in some cases moving raw materials from
the supply source to the production line as well. Transportation,
warehousing, inventory control, order processing, and information
monitoring are among these activities. Effective logistics management
requires these activities, which either contribute the most to overall
logistics costs or are essential to fulfilling logistics tasks effectively.
Although these activities are essential to the companies’ ability to
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provide the customer with the desired goods and services, they
must be carried out by them as well.
2.1.1. Categories of Logistics

In logistics, customer requirements, orders, or marketing strategies
are accurately interpreted, as well as supporting the manufacturing
process, with the exact execution of the process of reaching the
product material from the origin to the point of consumption as
needed, ensuring the material is properly cared for from beginning
to end to prevent damage and reducing costs as efficiently as
possible. In logistics, products, and services are delivered where
and when they are needed. The responsibility of logistics is to
position raw materials, work in progress, and finished inventory
where and when they are needed in time and space. Many logistic
problems can be identified and solved, often before they occur, with
integrated logistic support, when properly understood and applied.
In its broadest sense, logistics comprises three major areas
or subsets of activities.
• Subsistence logistics deals with basic needs such as food,
KEYWORD clothing, and shelter. Subsistence logistics are relatively
stable and predictable at any given time and in any given
Responsibility refers
environment. Men and women, reason begins, know, within
to an obligation
to perform certain very narrow limits, what is needed, how much is needed,
functions in order where it is needed, and when it is needed. Subsistence
to achieve certain logistics is a primary activity of primitive societies and an
results. integral part of an industrial society. It forms the basis for
operational logistics.
• Operation logistics extends beyond the bare necessities
to include systems that provide luxuries and niceties.
Operations logistics include raw materials needed for
production by the enterprise. This category of logistics is
also relatively constant and predictable. All companies, from
car manufacturers to fast food chains, can determine with
high accuracy the quality of materials and the resources
needed for their production. However, operational logistics
cannot determine when a company component fails, what
is required to repair it, or how long the activity lasts.
Operational logistics, which deals with the movement and
storage of material in, through, and out of the enterprise,
forms the basis for system logistics.
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• System logistics includes the resources required to keep

a system in working order. These resources or logistic
elements are spare and repair parts, personnel, and training,
technical publications, testing, and support equipment and
facilities. A well-thought-out integration of these logistics
elements is crucial if e.g., Repair instructions describe
one repair method and tools are developed for another
method. Therefore, repair may be impossible.
2.1.2. Logistic Information System and its

Objectives
This type of system manages, controls, and measures logistical
activities within an organization or across the SC as a whole. For
logistics efficiency and effectiveness, you need logistics information
systems. Logistics information systems aim to accomplish the
following in an enterprise:
• Ensures that logistics functions are integrated into a
process that strives to achieve the highest level of customer
satisfaction at the lowest total cost.
• Logistical activities related to order fulfillment can be
planned and controlled using an information system.
KEYWORD
• Making better strategic and tactical decisions increases Customer
the firm’s competitiveness, and benefits both the firm and satisfaction (CSAT)
is a measure
its customers.
of how well a
• Supports customer service by providing information about company's products,
order status, delivery schedules, and product availability. services, and overall
customer experience
• Planning requirements reduce inventories and human meet customer
resources requirements. expectations.
• Information is exchanged between marketing, financial,
and manufacturing information systems and provided to
top management for strategic decisions.
• With the use of information technology (IT) in information
systems, firms can respond quickly to demand, making
forecasting obsolete. This has also allowed them to go
with “pull” systems such as just-in-time (JIT), making them
more competitive.
• Systems are promoted that connect firms’ operations, such
as manufacturing and distribution, with the operations of
their suppliers and customers.
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• The use of information makes it possible for organizations

to manage dispersed inventories just as if they were single
inventories. As a result, one safety stock will be required
rather than many if inventory management is centralized
and decisions regarding replenishment and other quantities
are made on the basis of a single stock. There is no
need to carry a large quantity of stock, either near the
point of production or consumption in the system. This
is a concept called e-inventory management or ‘virtual
inventory management.’
2.1.3. Analysis of Location in Logistics

The location of plants and distribution centers is a common problem
faced by logistics managers. Increased production economy and
reduced transportation costs have focused attention on distribution
KEYWORD centers.
Logistics Due to global purchasing and marketing decisions, location
management analysis has been expanded to include logistics channel design.
refers to the Global operations make it harder to decide what logistics channels
acquisition, storage
to use, which alternatives to implement, and how much it will cost.
and transportation
of inventory from In logistics management, the location decision stage focuses
its origin to its
destination.
on selecting the number and location of distribution centers.
Typical Management Questions:

• What is the optimal number and location of distribution
centers for the firm?
• Which customers or markets should each distribution center
serve?
• What product lines should each plant or distribution center
produce or stop producing?
• How should international markets be served and material
sourced?
• What combination of public and private distribution facilities
should be used?
Data-intensive and complex location analysis problems are
created due to the number of locations multiplied by alternative
location sites multiplied by stocking strategies for each location.
Since detailed demand and transportation information is required
for the analysis, data intensity is created. The techniques used are:
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• Analytic techniques;
Remember
• Optimization or linear programming techniques; and
Logistics
• Simulation techniques. management is
a small portion
of SCM which
2.2. LOGISTICS PLANNING PROCESS combines the ow
of goods, services,
It is imperative to adopt a systematic planning and design information, and
capital right from
methodology to incorporate relevant considerations and to evaluate raw material to its
alternatives effectively in light of the constantly changing environment �nal consumer
in logistics due to changes in markets, competitors, suppliers, and
technologies. In logistics, relationships are important, and the
operating environment is ever-changing.
Changing customers, competitors, markets, requirements, costs,
and service requirements can affect a company rapidly, as can
establishing industries, markets, requirements, costs, and service
requirements. There is no one ideal logistics system that fits every
business, so alternative logistics strategies can also vary widely.
However, most logistics design and analysis situations can be
simplified by using a general approach. The logistics planning
process can be divided into three phases: problem definition and
planning, data collection and analysis, and recommendations and
implementation. The following discussion describes each phase
and illustrates the types of problems encountered.
2.2.1. Phase 1: Problem Definition and Planning

Phase 1 of the logistics planning process provides the foundation
for the entire project. A thorough and well-documented problem
definition and plan are essential to all that follows:
• Feasibility Assessment: An assessment of the necessity
and desirability of change is called a feasibility assessment,
and it involves activities such as situational analysis,
logic development, and cost-benefit analysis. Therefore,
we will be able to determine future estimates based on
our understanding of the current system’s environment,
processes, and performance characteristics.
- Situational Analysis: Senior management uses
situational analysis to gain a better understanding
of the current and future logistics capabilities as well
as their strengths and weaknesses. By analyzing the
current logistics environment based on measures and
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characteristics, the situational analysis describes:

- Internal Review: Internal review is necessary to
develop a clear understanding of existing logistics by
covering the overall logistics process as well as each
logistics function with respect to its stated objectives
and its capabilities to meet those objectives. It profiles
historical performance, data availability, strategies,
operation, and tactical policies and practices.
The comprehensive review attempts to identify opportunities
that might motivate or justify redesigning or refining the
logistics system, including workforce, equipment, facilities,
relationships, and information. For each major logistics
activity, an assessment must take into account the process
(physical flow and information within the value chain),
decisions (the logic and criteria used to manage the
value chain), as well as key measures. A firm’s ability to
measure key performance indicators is the focus of these
measurements.
KEYWORD
• Market Assessment & Competitive Evaluation: The
workforce is a objective is to document and formalize customer perceptions
concept referring to and desires with regard to the changes in the firm’s
the pool of human logistical capabilities. It’s the review of the trends and
beings either in
service demands required by customers by the use of
employment or in
unemployment. interviews with the selected customers or through customer
surveys. Assessing suppliers, customers (wholesaler and
retailer), and consumers (final consumer) includes both
trends in processes and requirements, as well as the
enterprise and the competitors.
• Technology Assessment: Transportation, storage, material
handling, packaging, and information processing are all
key logistics technologies. The assessment considers
the firm’s capabilities in terms of current technologies
and the potential for applying new technologies. This
assessment seeks to identify advancements that can offer
effective trade-offs with other logistics resources, such as
transportation and inventory.
- Supporting Logic Development: This comprehensive
review is followed by the development of a supporting
logic that integrates findings from the internal review,
external assessment, and technology study. This
supporting logic builds on this comprehensive review
in three ways.
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• First: As part of logic development, logistics principles

like the tapering principle and the principle of inventory
aggregation are applied to evaluate potential opportunities
for logistics improvement and determine whether additional
investigation is needed. Benefits or costs resulting from
the changes should be clearly identified.
- Second: A thorough, factual analysis and evaluation
that is not influenced by opinion are used to critically
evaluate current procedures and practices. This enables
the identification of areas for improvement, which, in
turn, provides the foundation for determining whether
strategic adjustments are needed. This evaluation
process aims to classify planning and evaluation
issues into primary and secondary categories across KEYWORD
short- and long-term planning horizons. logical statement
- Third: It is important to include clear statements is a statement
of possible redesign alternatives in the process of which has a definite
truth value which is
developing supporting logic, such as:
invariant.
• Defining current procedures and systems;
• Based on leading industry practices and competitive
practices, identifying the best system design alternatives;
and
• Technology and theory-based suggestions for innovative
approaches.
As well as being practical, alternatives should challenge
existing practices as well. Flowcharts and/or outlines are
generated that illustrate each alternative’s basic concepts,
frame opportunities for flexible logistics practices, clearly
identify value-added and information flow requirements,
and provide a high-level view of the options. To ensure
that the manager who is responsible for evaluating the
logistics strategy develops a logical strategy to develop
a logical statement and rationale for potential benefits,
this is a recommended practice. The manager should be
able to identify the most attractive strategy alternatives
by combining a customer service concept with logic and
methodology for logistics integration.
- Cost-Benefit Estimate: Feasibility assessment is a
preplanning estimate of the benefits of implementing
the recommendation based on the logistics analysis.
Benefits should be categorized as follows:
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• Service Improvements: In addition to enhancing

availability, quality, or capability, improved sciences may
also increase customer loyalty.
• Cost Reduction: There are two ways in which cost
reduction benefits can be observed:
- In the first instance, they can arise from one-time
reductions in financial and managerial resources that
are needed to operate the existing system, such as a
KEYWORD reduction in capital spending on inventory and other
distribution assets.
Financial analysis
refers to an
- Furthermore, cost reductions can be achieved by
assessment of the reducing out-of-pocket or variable expenses. New
viability, stability, technologies for material handling and information
and profitability of processing, for example, may reduce variables by
a business, sub- allowing more efficient operations.
business or project.
• Cost Prevention: By reducing involvement in programs
and operations that experience an increase in costs,
cost prevention reduces participation. A cost prevention
justification is based on an estimate of future conditions and
is thus subject to error, for example. A financial analysis of
future labor availability and wage levels is used to justify
many material handling and IT upgrades.
Ultimately, the decision to perform in-depth planning will
be determined by the strength of the supporting logic, the
credibility of estimated benefits, and whether the estimated
benefits provide a sufficient return on investment (ROI) to
justify organizational and operational changes. The out-
of-pocket costs associated with completing the process
must be weighed against the potential benefits.
• Project Planning: The complexity of logistics requires
careful planning for identifying and evaluating strategic
or tactical alternatives. Project planning consists of five
specific items:
- Statement of Objectives: The target image documents
the cost and performance expectations for the revision
of the logistics systems. It is important that they
are specific and related to measurable factors. The
objective fine market or industry segments, the timeline
for revisions, and specific service levels. For example,
desired delivery of 98% of all orders within 48 hours
of order placement, minimal customer shipments
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from secondary distribution centers, backorders for

a maximum of five days, etc. Specific definitions of
these goals drive system design efforts to achieve
explicit levels of performance. The total system cost
can then be determined.
- Statement of Constraints: The second consideration
in project planning is design constraints. Based on
the situation analysis, it is expected that management
will limit the scope of allowable system changes
depending on the specific circumstances of each
company. However, restrictions can affect the entire
planning process, e.g., a constraint common to the
design of distribution systems concerns the network of
KEYWORD
manufacturing facilities and their product range, which product range refers
management often keeps constant for the redesign to variations of a
of logistical systems as large financial investments single product that
are made in order
are made in existing manufacturing facilities. The
to create similar yet
purpose of developing a Statement of Constraints is distinctly different
to have a clearly defined starting point and overall products.
perspective for the planning effort. Various elements
of the existing logistic system will be retained as
part of the Statement of Constraints. These include
structures, systems, procedures, and/or practices.
- Measurement Standards: As a prerequisite to
formulating a plan, management must establish
policies for each category. Standardization identifies
cost structures and performance penalties and
provides a measure of success. Standards must
reflect the overall performance of the system, not a
narrow, suboptimal focus on logistic functions. They
must remain constant throughout the development of
the system once they are formulated. The standard
must be quantified or supported by logic, which is
a key measurement requirement. It is important to
include definitions of how cost components such
as transportation are calculated as well as relevant
customer service measures and calculation methods
in measurement standards.
- Analysis Procedures: Analysis techniques range
from simple manual methods to sophisticated
computer-aided decision-making tools. For example,
models with optimization or simulation algorithms to
evaluate and compare alternative logistics warehouse
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networks. Planning must identify alternative solutions

and choose the most appropriate approach based
on the information required to evaluate the project
issues and options.
- Project Work Plan: Based on the feasibility
assessment, goals, constraints, and analysis
techniques, a project work plan must be established
and the resources and time required for completion
identified. The alternatives and possibilities named
in the feasibility study form the basis for determining
the scope of the investigation. The scope in turn
determines the completion time. One of the most
common strategic planning mistakes is underestimating
the time required to complete a specific task. Overruns
require financial expenditure and reduce the credibility
KEYWORD of the project. A number of PC-based software
Expenditure is the packages exist to structure projects, control resource
spending of money allocation, and measure progress.
on something, or the
money that is spent
on something.
2.2.2. Phase 2: Data Collection and Analysis
In Phase 2 of the logistics planning process, data collection and
analysis are done in order to (1) define assumptions, collect data,
and (2) analyze alternatives.
1. Assumptions and Data Collection: The purpose of this
activity is to develop detailed planning assumptions and
identify data collection requirements based on the feasibility
assessment and project plan.
a. Define Analysis Approach and Techniques: Analytical,
simulation, and optimization techniques are the most
common
1. Analytical approaches use standard numerical methods,
such as those available through spreadsheets, to evaluate
logistics alternatives. For example, spreadsheets have
become more popular for distribution analysis.
2. The simulation approach is similar to a “wind tunnel”
when evaluating logistics alternatives with considerable
uncertainty. There are two types of testing environments:
physical (a model material handling system that physically
illustrates product flow in a simulated environment) and
numerical (a computer model that illustrates product flow on
a computer screen of a material handling environment). The
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current software makes simulation one of the most cost-

effective approaches to dynamically evaluating logistics
alternatives.
3. The goal of optimization is to evaluate alternatives and
select the best one. As a result of its high performance,
optimization is widely used to evaluate logistics network
alternatives such as distribution centers’ number and
location.
b. Define and review assumptions: On the basis of the
situation analysis, project objectives, constraints, and
standards for measurements, assumptions are defined
and reviewed. Assumptions define the key characteristics,
variables, and economies of current and alternative systems.
Assumptions are usually divided into three categories:
1. Business assumptions: A logistics plan must operate
within the characteristics of the general environment,
including market, consumer, and product trends, as well
as competitive actions. They are generally beyond the
firm’s control.
2. In most cases, management assumptions define the
current or alternative logistics environment in terms of its
physical and economic characteristics and are within the
firm’s control. An alternative distribution facility, a transport KEYWORD
mode, a logistics process, as well as fixed and variable consumer is a
costs are typical assumptions. person or a group
3. An analysis assumption refers to constraints and who intends to order,
limitations associated with fitting a problem to an analysis or use purchased
goods, products, or
technique. They typically refer to problem size, degree of
services primarily
analysis detail, and solution methodology. for personal, social,
The elements of assumption categories are as follows: family, household
and similar
Business Assump�ons needs, who is not
1. Scope: Defining the product lines and business units that directly related to
will be included entrepreneurial or
business activities.
2. Alternatives: A range of options to consider
3. Market Trends: The nature and magnitude of changes in
buying patterns and preferences
4. Product Trends: The nature and magnitude of market
preferences and buying patterns, especially in terms of
package size and packaging.
5. Competitive actions: Strategies, strengths, and weaknesses
of competitive logistics.
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Management Assump�ons
1. Markets: Product and shipment demand patterns by
market area
2. Distribution Facilities: The location, business policies,
economic characteristics, and performance history of
current and potential distribution facilities.
3. Transportation: Rates for transporting goods between
distribution centers and customers
4. Inventory: Inventory levels and operating policies for
each distribution center
Analysis Assump�ons
1. Product Groups: A detailed overview of products grouped
according to their scope of analysis.
2. Market Areas: A grouping of customer demands to suit
the scope of analysis
KEYWORD
Data collection - Identify data resources: The data collection process
or data gathering begins with a feasibility assessment. A fairly detailed
is the process specification of data is required to formulate or
of gathering adapt the analysis technique. In situations where
and measuring data collection is extremely difficult or the required
information on level of accuracy is unknown, sensitivity analysis can
targeted variables
be used to determine data collection requirements.
in an established
system, which then For e.g., an initial analysis can be performed using
enables one to transportation costs estimated using distance-based
answer relevant regressions.
questions and The types of data required for a logistic design study can be
evaluate outcomes.
divided into three classes: business assumptions, management
assumptions, and analysis assumptions. Most of the data needed
in a logistic study can be obtained from internal records. Although
extensive searches may be required, most information is widely
available. The first important category of data is sales and customer
orders. Annual sales forecast and percentage of sales per month
as well as seasonal patterns are required to determine logistic
volume and activity level. Historical patterns of sales order invoices
are also needed to determine shipping patterns by market and
shipping size.
The combination of aggregated requirements and detailed order
profiles of projects represents the requirements that the logistics
system must meet. Specific customer data is also required to
account for the cost and time involved in transporting the products
over distances.
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The complexity of analysis can be reduced by aggregating

customers and markets by location, type, size, frequency of orders,
growth rate, and specialized logistics services. Identifying and
tracking the manufacturing and purchasing costs is essential for
an integrated channel analysis. Plants, product mix, production
schedules, and seasonality are often factors to consider. Inventory
transfer policies, reordering procedures, inventory control rules, and
product allocation procedures, as well as inventory control policies.
A warehouse’s operating costs, capacity, product mix, storage level,
and service opportunities, as well as transport data requirements,
should be determined. Data requirements for transportation include
the number and type of modes of transportation, the criteria used
to choose modes, tariffs, and transit times, as well as shipping
regulations and policies.
To evaluate future scenarios in logistics analysis, a select amount
of future market data is necessary. Although the management may
be able to prepare a consolidated sales forecast, it is difficult to KEYWORD
prepare a market-by-market forecast of sales. Two solutions can
be found to this problem. Inventory control
is the process of
- In order to determine future logistics requirements, ensuring the right
the company can use demographic projections amount of supply
that correlate highly with sales. A data bank of is available in an
organization.
environmental information can also be obtained from
secondary data published by various government
agencies.
- Monitoring the strategies and capabilities of your
competitors can help you to establish benchmarks for
customer service, distribution networks, and operating
capabilities by documenting their logistical systems.
• Collect Data: Once the data sources have been identified
the company can start assembly of required data and
conversion of that data to an appropriate format for the
analysis tool. The data collection process should be
documented properly to avoid errors like overlooking data
that does not reflect major logistic components or collecting
data from a misrepresentative time period.
• Collect Validation Data: As a result of validation,
management will be more credible regarding the analysis
process and the results will reflect reality more accurately.
When analyzing results based on data that may not
accurately reflect the past, it is important to conduct a
thorough investigation.
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• Analysis: The analyst uses the technique and data from

the previous activity to evaluate logistics strategic and
tactical alternatives. The process of analysis includes:
- Define Analysis Questions: In this process, specific
analysis questions are defined concerning alternative
options and the range of acceptable uncertainty. By
identifying specific operating policies and parameters,
these questions build on research objectives and
constraints. For example, inventory analysis questions
might focus on alternative services and uncertainty
levels.
- Validate and Complete the Baseline Analysis:
KEYWORD Second, the current logistics environment is analyzed
using the appropriate methods and tools. Results are
Sensitivity analysis
compared with validation data collected previously to
is the study of how
the uncertainty in determine the degree of fit between historical and
the output of a analytical findings. The comparison should focus on
mathematical model identifying significant differences, determining sources
or system can be of possible errors, and identifying and correcting them.
divided and allocated
- Analyze All Alternatives: An evaluation of systems
to different sources
of uncertainty in its alternatives should be accomplished either manually
inputs. or electronically to determine the relevant performance
characteristics of each alternative.
- Complete the Sensitivity Analysis: As part of
this phase, uncontrollable factors such as demand,
factor cost, or competitive actions are varied to
assess whether potential alternatives can operate
under different circumstances. To choose the best
alternative, sensitivity analysis is combined with
scenario probabilities assessed in a decision tree.
2.2.3. Phase 3: Recommendations &

Implementations
Phase 3 of the logistics planning process operationalizes planning
and design efforts by making specific management recommendations
and developing implementation plans.
a. Recommendations: Alternative and sensitivity analysis
results are reviewed to determine recommendations to
management. There are four steps in this part of the
phase namely:
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1. Select the Best Alternative: To identify the two or three

best alternatives, the performance characteristics and
conditions of each alternative must be compared in a
decision tree analysis. The best alternative will be the one
that meets the desired service objectives at the lowest
total cost.
2. Analysis of Costs and Benefits: In a Cost Benefit
Analysis, alternatives are compared for a base period
and comparative operations are projected over a specific
planning horizon. The benefits include cost reduction,
service improvement, and cost prevention. Therefore, to
evaluate a logistics strategy’s potential, a comparison
of present cost and service capabilities with projected
conditions must be conducted for each alternative.
3. Develop a Risk Appraisal: Planning environment risk
appraisal considers the probability that the assumptions will
be met. It also considers the potential hazards associated
with the changeover of the system. A sensitivity analysis
can be used to quantify the risk of adopting a selected
alternative. For example, the impact of each alternative
on system performance can be determined by varying
assumptions. In the event that the planning assumptions
fail to come true, a risk appraisal provides a financial
estimate of the downside risks. In addition to quantifying
system changeover risks, a series of contingency plans
could also be tested to determine their potential impacts,
such as unanticipated delays and contingency plans. KEYWORD
4. Develop Presentation: As a final step in this process,
a report is presented to management / submitted to Accountability is
the acceptance of
management that identifies specific operating and strategic responsibility for
changes, provides qualitative reasons to justify these one's own actions.
changes, and then quantitatively justifies the improvements
in service, expenses, asset utilization, or productivity.
b. Implementation: The actual implementation of the planning
process is the final stage of the logistics planning process.
Obtaining a tangible return from the planning process
requires an appropriate implementation procedure.
1. Define Implementation Plan: Implementation plans must
include individual events, sequences, and dependencies.
They may begin at a macro level and then be refined
to provide accountability and responsibility for individual
assignments. Identifying interrelationships between events
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and defining the sequence of completion is the role of

plan dependencies.
2. Schedule Implementation: A schedule for implementation
Did you Know? is developed based on the assignments identified in the
In 2003, the Global previous stage. It is necessary to allow adequate time to
Institute of Logistics acquire equipment and facilities, negotiate agreements,
was established and develop procedures.
as a think tank 3. Define Acceptance Criteria: The criteria for evaluating the
for the profession, success of the plan are then developed. The Acceptance
focusing primarily
Criteria should focus on service improvements, cost
on intercontinental
reduction, improved asset utilization, and enhanced quality.
maritime logistics.
Although the acceptance criteria may focus on the area/
Container logistics
function which was the main focus of the Plan, it should
and the role of the
seaport authority in also take a broad perspective that focuses on total logistics
maritime logistics are system performance rather than the performance of an
of particular interest individual function.
to it. 4. Implement: The final task is the actual implementation of
the plan or design. Implementation must include adequate
controls to ensure that performance occurs on schedule
and that acceptance criteria are carefully monitored.
2.3. BUSINESS OBJECTIVES OF LOGISTICS

SYSTEMS
Logistic objectives can be summarized as follows:
• Cost reduction;
• Capital reduction; and
• Service improvement.
Ideally, logistics systems ensure the flow of supply to the
buyer, ensuring:
• right product;
• right quantities and assortments;
• right places;
• right time;
• right cost/price; and
• right condition.
This implies that a company will strive for a logistics system
that maximizes customer service and minimizes distribution costs.
However, one can approach reality by defining the goal of the
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logistic system to achieve a desired level of customer service, i.e.,

the level of delivery assistance provided by the seller to the buyer.
Therefore, logistics management starts with covering customer
needs up to their fulfillment through product deliveries and during
this delivery process considers all aspects of performance, which
include the organization of receipts, the manufacture of goods
and the physical distribution of products. However, there are some KEYWORD
specific goals that must be achieved through a proper logistic
system. These can be described as follows: Frugality is the
quality of being
1. Improving Customer Service: As we know, the concept of frugal, sparing,
marketing assumes that the sure way to maximize profits thrifty, prudent
in the long term is to maximize customer satisfaction. or economical in
the consumption
Therefore, an important goal of all marketing efforts,
of consumable
including physical sales activities, is to improve customer resources such
service. Efficient management of physical distribution can as food, time or
help improve levels of customer service by developing an money, and avoiding
effective warehousing system and fast and economical waste, lavishness or
transportation, all of which maintain optimal inventory extravagance.
levels. However, as mentioned earlier, the level of service
directly impacts the cost of physical distribution. Therefore,
when deciding on the level of service, a careful analysis
of customer desires and competitor policies is required.
Customers may be interested in several things such as
timely delivery, careful handling of goods, reliability of
stocks, the economy in operation, and so on. However,
the relative importance of these factors in the minds of
customers can vary. Therefore, an effort should be made to
determine whether they value on-time delivery or frugality
in transportation, etc. If the relative weights are known, it
should also be analyzed what the competitors are offering
in this regard? This, along with an estimate of the cost
of providing a particular level of customer service, would
help in deciding the level of customer service.
2. Rapid Response: Responsiveness refers to a company’s
ability to meet customer service needs in a timely manner.
IT has increased the ability to defer logistical operations
to the latest possible time and then achieve rapid delivery
of the required inventory. The result is the elimination
of excess inventory that has traditionally been held in
anticipation of customer demands. The ability to respond
quickly shifts the operational focus from an anticipatory
attitude based on forecasts and inventory levels to respond
to customer demands on a shipment-by-shipment basis.
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Because inventory in a time-based system is typically

not moved until customer requirements are known and
performance is promised, there is little tolerance for
operating inefficiencies.
3. Reduce total distribution costs: Another frequently
mentioned goal is minimizing the cost of physically
distributing the products. As explained earlier, the cost of
physical distribution is made up of various elements such
as transportation, storage, and inventory maintenance, and
any reduction in the cost of one element may result in
an increase in the cost of the other elements. Therefore,
the company’s goal should be to reduce the total cost of
distribution and not just the cost incurred for a single item.
For this purpose, the total costs of alternative distribution
systems should be analyzed and the one with the minimum
total distribution costs should be selected.
4. Generating additional sales: Another important goal of
the physical distribution/logistics system in a company
is to generate additional sales. A company can attract
additional customers by offering better services at the
lowest prices. For example, a company can achieve a
larger market share by decentralizing its warehousing or
by using economical and efficient means of transport. The
loss of loyal customers can also be stopped by avoiding
the out-of-stock situation.
5. Creating time and place utilities: The logistics system
also aims to create time and place benefits for the products.
Unless products are physically transported from their
place of origin to the place where they are needed for
consumption, they serve no purpose for users. Likewise,
the products must be provided at the time they are needed
for consumption. Both of these goals can be achieved by
increasing the number of warehouses located in places
where goods can be delivered quickly and where sufficient
stocks are maintained to meet customers’ emergency
needs. Also, a faster mode of transportation should be
chosen to get the products from one place to another in the
shortest possible time. Thus, time, and location functions
can be created in the products through an efficient system
of physical distribution.
6. Price stabilization: Logistics also aims to stabilize
the prices of the products. This can be achieved by
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regulating the flow of products to market through judicious

use of available transportation facilities and compatible
warehousing operations. For example, in sectors such as
cotton textiles, there are strong fluctuations in the supply
of raw materials. If market forces were allowed to operate
freely in such cases, the commodity would be very cheap
during harvest time and very expensive during the off-
season. Prices can be stabilized by stockpiling the raw
material during periods of oversupply (harvest time) and
making it available during periods of scarcity.
7. Quality improvement: The long-term goal of the logistics
system is the search for continuous quality improvement.
Total Quality Management (TQM) has become an important
obligation in all areas of industry. KEYWORD
Comprehensive commitment to TQM is one of the most
Quality
important forces contributing to the logistics renaissance. If improvement (QI) is
a product becomes defective or service promises are not a systematic, formal
kept, the logistics bring little or no added value. Logistics approach to the
costs once incurred cannot be reversed. If the quality analysis of practice
fails, the logistical performance usually has to be reversed performance and
and then repeated. The logistics themselves must meet efforts to improve
performance.
demanding quality standards.
Logistics operations typically need to be performed 24/7
across a vast geographical area, adding to the management
challenge of achieving zero-defect performance in logistics.
The quality challenge is compounded by the fact that most
logistical work is performed from the manager’s perspective.
It is far more expensive to rework a customer’s order if
the shipment is incorrect or the shipment is damaged than
to get it right the first time. It is essential to develop and
maintain continuous TQM improvements through logistics.
8. Life-Cycle support: A good logistic system helps to support
the life cycle. Few items are sold without a guarantee that
the product will perform as advertised over a period of time.
In some situations the normal value-added flow of inventory
to the customer must be reversed. Product recall is a critical
competency that arises from increasingly stringent quality
standards, product expiration dates and responsibility for
dangerous consequences. Requirements for take-back
logistics also result from the increasing number of laws
that prohibit the disposal of beverage packaging and
packaging materials and encourage recycling. The most
important aspect of reverse logistics operations is the
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need for maximum control when there is a potential health

hazard (i.e., contaminated product). In this sense, a recall
program is similar to a maximum customer service strategy
that must be implemented regardless of cost. Firestone’s
classic response to the tire crisis is an example of turning
adversity into advantage.
Reverse logistics addresses a wide range of operational
requirements, ranging from minimizing total costs for
recycling bottles to optimizing performance for recalls.
Without carefully reviewing reverse logistics requirements,
a sound logistics strategy cannot be formulated.
9. Movement consolidation: Since the logistics system aims
at cost reduction through integration, one of the most
significant logistics costs is transportation. Transport costs
are directly related to the type of product, the size of the
shipment, and the distance. Many logistics systems with
premium service rely on the transport of small shipments
at high speeds. Premium transport is usually expensive.
A warehouse enables In order to reduce transportation costs, it is desirable to
businesses to pack achieve movement consolidation. In general, the larger
and grade their the total shipment and the longer the transport route, the
goods according to lower the transport costs per unit. This requires innovative
legal requirements
and customer
programs for grouping small shipments for groupage. Such
needs. The logistical programs need to be facilitated by working arrangements
cost is reduced, that extend across the SC.
while flexibility is
maximized. This type
of facility can be
2.3.1. The Importance of Warehousing in a
an ideal distribution Logistics System
location, eliminating
the need to arrange Warehousing is a requirement for most companies that manufacture,
for pickup and import, export, or transport goods. You might see it as an
hire employees to unnecessary expense, but it can actually save you money and
manage fulfillment. increase your productivity. The customer journey does not end
with the order. A warehouse gives you better control over your
inventory and ensures customers receive their products on time,
ultimately leading to increased profits.
1. Better Inventory Management: About 8 percent of small
businesses don’t track their inventory. About 24% have no
inventory at all. This often results in late deliveries, delayed
order processing, and a poor customer experience.
In addition to making it easier to track and manage your
inventory, warehouses provide a central location for your
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goods. By investing in a warehouse, you will be able to

store, ship, and distribute your products more efficiently.
Customers will be offered alternative options instead of
keeping them waiting for days or weeks if something is
out of stock.
2. More Efficient Packing and Processing: Most warehouses
provide the equipment and materials you need to store,
transport, pack, and process customer orders. Pallet racks,
loading ramps and packaging materials are just a few
examples. This way you have everything in one place,
saving you time and money.
3. Superior Customer Service: More than 63% of online
customers expect to know the estimated or guaranteed
delivery time. About 88% would pay more for faster delivery.
In fact, delivery speed is one of the first things buyers
consider when choosing a carrier. As a business owner, you
want your customers to be happy and engaged. If you don’t
deliver your orders on time, your reputation will suffer. This
can hurt your sales and brand image. Warehousing enables
timely delivery and optimized distribution, resulting in higher
labor productivity and greater customer satisfaction. It also
helps reduce errors and damage in the order fulfillment KEYWORD
process. It also prevents your goods from being lost or Reputation is
stolen during transshipment. a ubiquitous,
4. Ensure Price Stabilization: According to factors such as spontaneous, and
income, government policies, employment rates, climatic highly efficient
mechanism of social
conditions, and others, demand for goods and services
control.
varies from month to month and year to year. If your
company manufactures and sells sports equipment, you
can store your products for a later date. This helps stabilize
prices and reduces sales losses. In this way, you can
maintain constant stock levels and maximize your profits
if you offer ski accessories instead of selling them for
almost nothing after the cold season.
5. Improved Risk Management: Warehousing not only
protects against price fluctuations but also provides secure
storage for perishable products. Depending on the needs
and type of business, you can rent a warehouse equipped
with refrigerators, freezers, and optimal temperature control.
Plants, artwork, candles, groceries, and medicines are just
a few examples of goods that need refrigerated storage.
A warehouse offering this service will store your goods at
the right temperature, preventing spoilage and changes
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in color and texture. This also helps to extend the shelf

life of the products and ensure customer satisfaction. In
addition, the products stored in warehouses are usually
insured. This means that in the event of damage, fire, or
theft, you have a better chance of being compensated by
your insurance company.
2.3.2. Logistics Activities and the Customer

Order Decoupling Point (CODP)
The design of a logistic system depends on the performance goals
of that system in relation to the markets it intends to serve. It is a
well-established management tenet that the nature of the demand
for a product should be carefully considered before designing a SC
strategy. If the product cost is the main issue, the SC should be
KEYWORD efficient; When quality and speed are more important to customers,
the SC should be responsive and secure. SCs today are expected
lead time is the to be extremely flexible, responsive, and cost-effective to meet
latency between ever-changing consumer demand. Some SCM authors argue that
the initiation and
completion of a
organizational or SC performance is influenced by four factors:
process. • ‘Inventory’ is all raw materials, work in process, and finished
goods within an organization. The level of inventories
influences product quality, the delivery lead time, and the
costs associated with that delivery.
• ‘Transportation’ entails moving inventory from point to point
in the SC. Transportation can involve the use of many
combinations of modes (e.g., truck, train, plane, boat)
and routes, each with its own performance characteristics.
• A ‘facility’ is a location where inventory is stored, conditioned,
assembled, or manufactured in the FSCN. Production/
processing sites and storage sites (distribution centers)
are the two major types of facilities. The performance
of the SC is significantly affected by decisions regarding
facility location, capacity, and flexibility, regardless of the
facility’s function.
• ‘Information’ plays an important role in driving SC
performance since it affects inventory, transportation,
facilities, and customers.
The decisions made in relation to these factors and the
associated operational processes determine the responsiveness
and efficiency of the SC. So let’s take a look at the operational
processes that leverage inventory, transportation, facilities, and
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information. As we have seen before, the traditional view of logistics

management in a SC is the ‘cycle view.’ Chain processes in a SC
are divided into a series of cycles, each performed at the interface
between two consecutive stages of a SC. A cycle view of the SC
clearly defines the business processes and activities involved, as
well as the owners of each process and their respective roles and
responsibilities. In addition, the main processes are to a certain
extent decoupled due to warehousing between cycles. This implies
that each process can function independently and is not hampered
by problems in other processes. In other words, each actor in
the SC manages its own processes without coordination with
chain partners. This contradicts the ‘JIT’ philosophy of inventory
management, which among other things states that the decoupling
of activities through inventory should be eliminated as it hinders
SC visibility and supports SC sub-optimization.
Reducing inventory levels is beneficial from the point of view
of transparency and cost reduction. If you consider the nature of
the products in agricultural and food businesses, this is also an
advantage for quality reasons. These companies have to deal with
specific characteristics of the product and the processes, such
as perishability, with consequent limitations in terms of time and
condition for storage. Sometimes products are shipped from far
away or it is necessary to wait for the products to be harvested.
Uncertainty and fluctuations in product quantity and quality, bulky KEYWORD
goods flows, and so on.
Inventory reduction
Traditional inventory management principles, designed primarily is the process of
lowering inventory
for the manufacturing industry, do not necessarily apply. The
levels to a point
main challenge for food companies is to match (often uncertain) where they meet
supply and (often uncertain) demand while considering specific customer demand.
product quality and safety requirements. It is also important to
remember that excessive inventory levels in SCs tie up capital
that could otherwise be used in productive investments. This
is an area of particular concern for developing countries. The
push/pull view of SCs is gaining increasing interest (Figure 2.1)
due to the increasing variability and uncertainty of consumer
demand, which leads to increased demand for capacity flexibility
and thus inventory reduction.. This view aims to eliminate as much
inventory as possible in the SC and focuses on the extent to which
customer orders penetrate or can penetrate the logistics system.
By eliminating inventory at the retailer and wholesaler, they take
fewer risks by stocking the wrong products. So when a customer
arrives and requests a product, the retailer orders the product
from the processor, which results in a delivery time. For example,
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consider buying a car made to the customer’s expectations (with

or without a sunroof, radio, etc.).
This type of customization is now also being used in food SCs;
where is it stored, and which stages in the SC are flexible enough
to order the product first and then deliver it? The starting point is not
the individual consumer, but the retailer. Due to product proliferation,
shelf space in retail stores has decreased tremendously. This leads
to the demand for frequent deliveries and short delivery times.
Some products are packed in customized packaging materials. This
packaging process can take place at the wholesaler, processor,
or producer. The less handling in the SC, the lower the costs and
quality losses. The idea is to minimize stock levels in the SC. If the
producer, the processor, and the retailer store, this leads to a long
product throughput time, high costs, and a possible deterioration
in quality. By eliminating inventory in the SC as much as possible,
costs are minimized, quality optimized, and service maximized as
the right product is delivered in the right quality and quantity.
Figure 2.1. Views

on supply chain
processes.
Source: https://slideplayer.com/slide/12205473/72/images/20/Cycle+V
iew+of+Supply+Chain+Processes.jpg.
One of the concepts that feed into the push/pull view is the
Customer Order Decoupling Point (CODP), also known as the
Demand Penetration Point (DPP). This point separates the part
of the SC where management decisions are driven by customer
orders (pull process) from the part of the SC where production
plans are created based on forecast consumer demand and/or
forecast orders from partners down the chain (push process).
According to the CODP – i.e., towards the customer – the material
flow is controlled directly via the customer orders and the focus is
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on customer proximity (throughput time and flexibility). Upstream

to the suppliers, the material flow is controlled by forecasting and
planning and the focus is on efficiency (usually using large lot
sizes) and taking into account inherent characteristics of material
flows and production capacities and resources. For each product-
market combination or product group in the company, it must be
determined where the decoupling point (DP) should be. Hoekstra
and Romme distinguish five possible positions of a DP as depicted
in Figure 2.2. These range from having inventory in all stages of
the SC and delivering customer orders from stock (DP 1), to having
practically no inventory in the SC and starting to assemble (make)
a product when the order comes in (DP 5). Hoekstra and Romme
regard the CODP as important for several reasons:
• It separates order-driven activities from forecast-driven
activities.
• It is the place where ‘independent demand’ is converted
into ‘dependent demand.’
• It generally coincides with the last major stock point in
the goods flow.
• It creates the opportunity for upstream activities to optimize
independently from irregularities in market demand (in
contrast to the JIT concept in which inventories are seen
as ‘blocking the view on problems’).
• It separates two areas in which the nature of decision-
making is very different: upstream from the CODP the
focus is on planning and efficiency, downstream the focus
is on the acceptance of orders and lead time management.
Figure 2.2. Five

positions of the
decoupling point.
Sourc e: https ://ww w.res earch gate .net/ prof ile/C or-Ve rdouw /
publication/40116779/figure/fig1/AS:669484469731360@1536628944
944/Five-positions-of-the-Decoupling-Point-adapted-from-Lampel-and-
Mintzberg-1996-and.png.
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It is clear that fewer DPs are possible in food SCs due to long
production lead times. Figure 2.3 gives an overview of possible
DPs in the SC of perishable products; in this case flowers and
potted plants. In the first two designs (DP1 and DP2), all products
are shipped to customers from local or regional stocks, and no
customization activities are carried out. In Design 3, potted plants are
customized (that is, value-added activities performed to customize
the plants) at the auction, retailer, or hub and successively delivered
to the points of sale. Finally, in Design 4, the grower has a direct
relationship with the end customer, harvesting, packaging, and
delivering its produce (via distributors or transport companies)
to the customers’ points of sale; the auction can be bypassed in
this network design. The concept is useful in determining whether
processors should produce and stockpile a large volume of finished
products, or attempt to minimize inventory levels by assembling/
packaging products to order.
Figure 2.3. Four

network designs
with different
decoupling points for
perishables.
Source: https://www.fao org/3/a1369e/a1369e.pdf.
There are several elements that have an upstream or

downstream influence on the position of the CODP (Figure 2.4); in
other words, where to keep the product inventory. It is a balancing
process between the delivery time desired by the customer, the
lead time in purchasing, production, and sales, and the expected
customer service of an organization. If the desired delivery time
is very short, the stock should be kept close to the market. On
the other hand, if the delivery time is relatively long, stocks could
be held upstream (towards the processors) in the SC by taking
advantage of centralized stock management. Other factors, such
as whether the products are universal or specific, also play a role
in this trade-off process.
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Figure 2.4.
Elements that
influence the
position of the
decoupling point.
Source: https://www. fao. org/3/a1369e/a1369e. pdf.
Currently, the general trend is to move CODP upstream in

the SC (move inventory to processors/suppliers) to increase
responsiveness to variable market demand and reduce the amount
of non-value-added activities (such as holding the wrong products
or the products in wrong packaging material in stock). The biggest
challenge every time is to find scenarios that allow fast deliveries
while keeping costs down.
2.4. EVOLUTION OF LOGISTICS AND SCM

In the 1970s, logistics, and SCM evolved from physical distribution
management, where the various functions of an organization acted
independently and worked towards its own goals. This short-sighted
approach then morphed into integrated logistics management in
the 1980s, which called for the integration of different functions
to achieve a system-wide goal. SCM further extends this scope
by involving the suppliers and customers in the organization
and coordinating the flow of materials and information from the
procurement of raw materials to the consumption of finished goods.
For better customer service at lower costs, SCM aims to
eliminate redundancies, reduce lead times, and reduce inventories.
To create customer value that leads to long-term increases in
corporate profits, shareholder value, and sustainable competitive
advantage, the focus has shifted from the “share of the market”
paradigm to the “share of the customer” paradigm. For the right
customer, at the right price, the right product, in the right quantity
and quality, at the right place, is delivered by a logistic network
that includes suppliers, retailers, and users. The purpose of an
integrated logistics network in a SC is to fulfill customer orders by
providing a place where products and services can be delivered
to end users. A SC’s value is realized by managing several key
functions.
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The functions include:

• Demand management;
• Inventory management;
• Transportation;
• Warehousing;
• Order processing; and
• Information Management;
Logistics is an important factor for collaboration in the SC. By
improving performance in this area, SCs can significantly increase
their efficiency and help create innovation in various areas. In this
KEYWORD context, an important task is to find structures and approaches
that enable all types of performance management in logistics and
Performance SCs to better meet customer needs, certain aspects of the internal
management
is a corporate
processing of materials into finished goods, and the movement
management tool of finished goods out of the organization and towards the end
that helps managers consumer.
monitor and evaluate
employees' work. When organizations focus on their core competencies and
become more flexible, they reduce their ownership of raw materials
and distribution channels. In order to perform these functions more
effectively or at a lower cost, other companies are increasingly
outsourcing them. This results in an increase in the number of
organizations involved in meeting customer demand, while a
reduction in managerial control over logistics operations. SCM
concepts were developed as a result of fewer controls and more SC
partners. By improving trust and collaboration between SC partners,
SCM improves inventory visibility and speed. A SC manager has
four main decision areas:
• Location;
• Production;
• Inventory; and
• Transportation (distribution).
Both strategic and operational elements are included in these
decision areas. There are subtle differences between SCM and
logistics, even though they are often used interchangeably. SCM
is more strategic than logistics in nature. SCM focuses more on
the chain links, contracts, relationships, supplier selection, financial
flows, and information exchange, as well as the construction of new
facilities, such as plants, warehouses, and distribution centers, as
well as broader issues such as society, the economy, government,
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and the environment. Logistics is more or less limited to the routine

movement and storage of goods. SCM is essentially about logistics,
and when logistics fail, the entire chain collapses.
2.4.1. Logistics – A Key Component of SCM Remember

The logistics
SCM involves the planning, design, control, and implementation of process is
all business processes related to an organization’s procurement, divided into two
manufacturing, distribution, and order fulfillment functions. All of subcategories:
inbound and
these activities involve multiple networks of vendors and service outbound logistics.
providers that are integrated and coordinated by the organization’s Its objective is to
SC professionals to move raw materials and finished goods to ensure the right
and from any remote location around the world. Logistics is the product is delivered
at the right time,
backbone that powers SCs. Logistics refers to managing the flow place, and quality.
of goods and supplies with information, data, and documentation
between two entities or points.
Logistics plays an important role in the replenishment function
of supplying raw material from supplier to place of production and
finished goods SCM from place of dispatch from factory to place
of delivery to the customer.
The flow of goods flows through a network of road, rail, air or
sea transportation, and intermediate warehouses to hold inventory
before being transported to shipping locations. The whole activity
involves multi-level suppliers, agents, and agencies, including
freight forwarders, packers, customs departments, traders, and
logistic service providers, etc.
• Logistics, Therefore, is an Integral Component of SCM:
The origin of logistics as a recognized discipline is attributed
to military and defense organizations. Defense detachments
use detailed and comprehensive planning to gather supplies
and transport men and materiel to various locations and
bases. The success of any military exercise depends
on the facility’s ability to gather information, analyze it,
process it, and take appropriate logistical measures to
continuously support its units.
• In many Cases, the Supply Chain is Often Referred to
as Logistics and Vice e Versa: Although logistics and
SC are closely related, the two do not mean the same
thing. Logistics is a sub-component and extension of the
SC. SC design in an organization would detail, plan, and
strategize procurement strategy, production site selection,
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distribution network design and development, and finished

goods strategy, etc., while logistics planning would deal with
the details of procurement logistics, distribution of finished
goods, order fulfillment , and inventory management, etc.
Logistics planning provides the strategic direction and
framework for its design planning from the SCM strategy.
Take the case of production sourcing, the SCM strategy
defines the process, supplier selection, sourcing strategy,
and order fulfillment method in conjunction with cycle
time and lead time to supply production. In this case,
logistics determine the type of transport of the supplier,
the shipment planning, the process for order initiation,
the consolidation of shipments, the types of transport
and suppliers, define the transit times, the documentation
KEYWORD process and implements the plan, controls, and monitors
Shipment Planning the flow of goods from Place of origin to place of delivery
is used to describe to the factory for production. In the case of finished goods
conditions that distribution, the SCM strategy defines the overall network
control how shipping
design for warehousing and other distribution channels.
is done.
Logistics deals with the full breadth of transportation
network design, partnering with third-party logistics (3PL)
providers to set up distribution centers and warehouses,
inventory management and operations planning including
packaging, bundling of promotions, etc., the primary, and
secondary distribution network, and the suppliers and
at the end the complete documentation and information
process for the entire chain of activities.
2.4.2. Logistics Operations in Supply Chain

Network
Logistics has helped and helped make global trade possible.
3PL service providers on a global and local level form important
partners for managing and providing SC services, and the second
important factor is the Internet and IT technology, which helps to
manage information and data in advance of or together with the
material – and flow of goods. SC consultants and professionals
find it very important to have knowledge of the operational area
and how things work on-site. Theoretical models can only be used
effectively by understanding and adapting to local realities.
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2.4.3. A Control Mechanism of Supply Chain

Logistics
To complete the entire delivery chain cycle, several agencies
are involved, including the buyer, the seller, a third-party freight
forwarder, transport companies at different hubs, shipping companies,
airlines, various government agencies, customs departments at Did you Know?
different locations, and banks. The term “business
A seamless movement of goods throughout the entire process logistics” has evolved
of exporting and importing, from start to finish, involves collaboration since the 1960s due
and communication among all parties involved. Decisions related to to the increasing
finance, business, technology, and operations arise at various stages, complexity of
supplying businesses
necessitating active participation and access to documentation and
with materials and
information by the logistics service provider, the buyer, and the
shipping out products
supplier. It’s crucial to have error-free logistics operations where
in an increasingly
the flow of information and documentation takes precedence over globalized supply
the physical transportation of goods. chain, leading to a
Not only is documentation important for physical logistics call for professionals
operations involving multiple agencies involved in the entire chain, called “supply chain
but also for the financial, commercial, and accounting processes logisticians.”
of both buyers and involved sellers. For the purpose of seeing
whether the sale has been made, the value of the shipment, and
the payment due, partner banks rely on complete transaction
documentation.
A set of documents covering specific aspects of each transaction
is required for a host of other factors, including the carrier’s
conditions of carriage, insurance requirements, and coverage. In
the SC, there are therefore standardized paperwork requirements
from buyers and sellers, 3PL carriers, customs requirements in
the exporting and importing countries, along with banking and
commercial requirements.
The entire set of documents and trading conditions have been
developed and standardized in all countries to facilitate international
trade.
Through INCO terms and EDI-enabled standardized
documentation, exports, and imports have become smoother and
more hassle-free, eliminating bottlenecks and delays, and eliminating
documentation requirements. These days, software applications offer
standardized documentation templates and modules that make the
process of creating documentation easier and faster.
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ERP software includes document formats as a critical component

of their internal procedures. 3PL logistics companies utilize different
software programs that have integrated shipping documents into
their operational protocols and provide online shipment tracking
with document transparency to clients. EDI technology has made
it possible to submit documents to customs electronically, and
electronic documentation has become commonplace in all regulatory
agencies. Nevertheless, for shipments to be processed, original
documents must be presented at customs and bank counters as
legal and negotiable documents.
2.4.4. A Tradeoff Between Efficiency and

Responsiveness in Supply Chains
The uncertainty framework is a simple yet powerful way to describe
a product when deciding on a SC strategy. This framework specifies
the two most significant uncertainties the product faces: demand
and supply.
Fisher suggests that the nature of the demand for a product
should be carefully considered before a SC strategy is (re)devised.
Fisher divides products into two categories:
● Energy/oil, furniture, and basic food products, for example,
are examples of ‘functional products’ satisfying basic needs.
Their long life cycles and stable demand make them
competitive, resulting in low-profit margins.
● ‘Innovative products’ usually have a higher profit margin,
a short life cycle, and a high level of product variety.
Examples include computers and fashion clothes.
Table 2.1.
Physically efficient
versus market-
responsive supply
chains
CHAPTER
2
According to Fisher, the problem with product availability in

SCs is the result of a mismatch between the nature of the product
and the nature of the SC. To minimize physical costs associated
with production, transportation, and warehousing, SCs that deal
with functional products should focus on efficiency/leanness.
On the other hand, SCs dealing with innovative products
should be designed with an emphasis on responsiveness/agility
to minimize market intermediation costs, i.e., opportunities and
dissatisfied customers. Table 2.1 compares both types of SCs.
What we have seen over the last 20 years in the western world
and more recently in developing countries is that consumers and
retailers have become much more demanding and product life
cycles have shortened significantly across all types of sectors
(e.g., computers, groceries, automobiles). In today’s marketplace,
flexibility, and customer responsiveness are the keys to long-term
competitive advantage. This has resulted in functional products
becoming innovative products with high demand uncertainty. The
problem is that the SCs that make these innovative products are
still primarily focused on efficiency. Fisher says they should shift
toward responsive, customer-centric SCs to be competitive again
(Figure 2.5).
Figure 2.5. Supply
chain design in
relationship with the
nature of product
demand.
Source: https://www.researchgate.net/publication/333033353_The_
relationship_between_product_nature_and_supply_chain_strategy_
An_empirical_evidence.
The CODP and postponement concepts lead to logistical

structures in which a consolidation point is used to perform product
differentiation according to customer requirements; The supply
part to the consolidation point is focused on efficiency and the
distribution part is focused on responsiveness. A stable process is
characterized by stable and high yields, more sources of supply,
reliable sources, fewer process changes, and easy changeover.
The evolving process is characterized by variable returns, limited
CHAPTER
2
sources of supply, unreliable suppliers, and more and more difficult

process changes, etc. This is very typical of agri-food SCs. Lee
describes four strategies that correspond to the four cells in Figure
2.6. In general, information systems play an important role in the
various strategies for sharing and enabling information to deal with
uncertainty. Let us discuss the four SC strategies:
Figure 2.6. Different

supply chain
strategies to cope
with (un)certainty.
Source: https://d3i71xaburhd42.cloudfront.net/d31ff854b53573b5116e
050e4cbe34955d56b797/6-Figure4–1.png.
• Efficient Supply Chains; Cost and information coordination

can be used to optimize profitability under low demand
and supply uncertainty. Low costs are realized through
the elimination of non-value-added activities, the pursuit
of economies of scale, and the optimization of techniques
and production. Commercial, non-perishable products are
examples of these SCs.
• Risk-hedging SCs; SCs with low demand uncertainty but
high supply uncertainty should follow the risk-hedging
strategy to reduce costs. This strategy implies that
companies with high SC uncertainty try to manage this
vulnerability by reacting with the lowest possible security
stock. To achieve this, they share their safety stocks with
comparable companies with the same key components.
This strategy, known as inventory pooling, is commonly
used by retail businesses. One could think of SCs for
fruit and vegetables.
• Responsive SCs; the responsive SC strategy focuses on
being responsive and flexible to meet the changing needs
of customers with an efficient SC. In order to realize this,
companies have mass customization processes. Also, the
CHAPTER
2
goal is to move the final assembly as far down the SC

as possible to be more responsive. Examples of these
SCs are meat SCs.
• Agile SCs; the agile SC strategy is a combination of risk
hedging and a responsive SC. These SCs seek to manage
demand and SC uncertainty to respond to unpredictable
demand. They are able to minimize supply disruptions by
pooling stocks that form a DP, e.g., a wholesale market.
Also, they could respond by moving the DP, where the final The SC manager
assembly takes place, as far down the SC as possible. should be aware of
Profitability in these types of SCs comes from the extra the complete set
margin they generate due to responsiveness and the of documentation
ability to minimize delivery costs. Examples are ready-to- requirements, along
eat products in supermarkets. with the various
aspects, in order to
It is clear that the easiest SC to manage in Figure 2.6 is the create processes
one in the top left cell (efficient chains). This means that SCs that and documentation
are currently in one of the other cells should try to move as far left control systems. A
(low demand certainty) and/or up (low supply certainty) as possible. manager’s aim is to
avoid errors in the
It is important to recognize that with perishable products, there
documentation that
are uncertainties related to shipment volume and product quality. will result in financial
Specific to perishable products is the dependence on weather and damage, delays in
seasonality, which is of great importance. Seasonality means that delivery, and poor
certain products cannot be grown in certain periods (winter/summer) performance.
and therefore the availability of products is lower at certain times.
In order to ensure year-round supply, a number of products have
to be imported from overseas, usually at higher prices. Demand
uncertainty might be best managed through collaboration and
sharing information between SC partners as often as possible, as
theory on SCM shows product-market combinations. The biggest
challenge for companies is to design resilient SC networks that
can handle these fluctuations.
2.4.5. Contract Logistics – Key Block in SCM

SC activities include multimodal transportation, customs clearance,
and warehousing activities at one or more locations throughout
the network. SC activities can be local within the country or
regional within a continent or region and global which is essentially
intercontinental. Global operations are the order of the day as
companies follow the markets and also seek lower switching costs,
which is achieved by setting up manufacturing facilities in countries
where costs are lower.
CHAPTER
2
Take the case of the pharmaceutical industry. High manufacturing

costs caused companies to move production from Europe and the US
to South Africa, India, and other cheaper countries. While inbound
shipments from these countries may be consolidated and dispatched
in each country by the carrier, they may also be dispatched by
the supplier to a third-party warehouse in the destination country
for VMI inventory replenishment. Inbound shipments can include
thousands of part numbers and hundreds of shipments from a
few hundred suppliers. Finished goods, on the other hand, would
be shipped directly from the factory to a distribution center in the
country, or exported to another distribution center abroad.
KEYWORD
You would receive finished goods procured for integration with
Outsourcing is an finished goods at the distribution center from local factories or
agreement in which imported finished goods from other distribution centers.
one company hires
another company The distribution center manages the inventory, completes all
to be responsible internal processes, etc. Further movement of the cargo occurs
for a planned or from the parent distribution center to the subsidiary or secondary
existing activity
which otherwise is
warehouse, from where it finally reaches the retailer. If you plot the
or could be carried two SCs above, you will see that at any point in time, the largest
out internally, inventory is stocked in the warehouse where supplier parts are
i.e. in-house, kept, as well as in the distribution center and subsidiary warehouse,
and sometimes the number of shipments in the pipeline would be in comparison
involves transferring to the inventory in the warehouses is very low. Plants don’t keep
employees and
inventories at all. Therefore, warehouses are vital to SC networks.
assets from one firm
to another.
Warehouses are the most important links in the SC and their
location and how they operate in relation to operations impact the
rest of the SC efficiency. Distribution centers, VMI centers, parts
centers, and various business models of warehousing activities
are now outsourced to 3PL service providers. Many companies
manage these as critical functions in-house, but there is a growing
trend toward outsourcing these activities.
A warehouse operation includes many value-added processes
and critical operations. In the case of factory logistics, these
activities include full responsibility for inbound traffic management,
yard management and receiving, warehousing, and inventory
management. Internal processes can include kitting; sub-assembly
and all other value-added processes that need to be managed
before parts are shipped to the factory. Every wrong transaction
or error in the transaction affects the production line and leads to
an increase in downtime. Other responsibilities managed include
scrap metal management, packaging material management, etc.
CHAPTER
2
In the case of automotive plants these warehousing activities

are very large and complex in size and word as independent
businesses on a 24/7 basis with senior management present
on site to manage this small business. Hypothetically, in typical
small operations, a logistics facility could receive over a hundred
shipments per day, unload around 50–60 containers per day and
maintain an inventory of between 20,000 and 35,000. SKU part
numbers held in various modes in 8000 to 10000 rack locations
and many more bulk storage locations.
Outbound shipments to the factory can be on an on-demand
basis – every two hours, and shipments can consist of a few
hundred parts assembled according to the BOM. All these activities KEYWORD
must take place continuously in shifts.
procurement
Many multinational companies have invested in building contract logistics is
the sourcing of
logistics capabilities, including managing semi-finished processes materials needed
within factories. Contract logistics companies have expanded their to manufacture
services to manage semi-finished processes. Managing specific products. In other
segments of the market requires SC managers, engineers, and other words, this part
technical staff. The automotive, retail, and many other industries in of the supply
Europe have perfected the development of core competencies in chain focuses
on purchasing
managing warehousing operations and SCs. When the operation
raw materials,
is larger than a warehouse and the processes involved go beyond replacement parts,
that, contract logistics is typically used. auxiliary supplies,
operating supplies
The business is managed by an on-site contract manager and other items
with administrative support staff and operations teams. Such sites needed for the
usually require large investments in infrastructure, including material manufacturing
handling equipment, racking, buildings, etc. As the operations and process to work.
investments are large, the contracts are usually multi-year. The
projects include the integration and building of interfaces with
the IT applications of both companies in order to facilitate daily
transactions.
2.4.6. Logistics Service Providers keep Supply

Chains Moving
It is the responsibility of different departments within a company
to manage procurement logistics, manufacturing logistics, and
finished goods logistics. The logistics functions are specific to each
department, as are the requirements and sensitivities of delivery
schedules, etc., despite the fact that the departments’ responsibilities
include common activities such as transportation, etc.
CHAPTER
2
With the emerging trends and the availability of 3PL providers,

companies have been pushed to adopt the practice of outsourcing
all SC components and logistics functions, known as non-core
functions, to their logistics providers. Here we will examine the role
and functions of third parties in a little more detail to understand
how they work. A difference from the SC activities.
The field of 3PL is a multi-layered or multi-level integration of
different players who have the niche segment expertise to manage
one or more functions of logistics.
KEYWORD
Contract logistics
A single service provider will not be able to manage the entire
is the outsourcing chain of activities under a logistics contract or SC network. The
of resource customer organization can receive a single window service from a
management lead logistic service provider that merges with and manages other
tasks, such as service providers. This service provider outsources many logistics
transportation and components to local players and contractors at all levels.
warehousing, by one
company to a third- As an example, a contract logistics facility may not be owned
party company. and operated by a 3PL provider. The facility is often outsourced
along with other operations such as loading, unloading, yard
management, and fleet management.
Logistics also works with the concept of 4-party logistics
providers on the market, who, as lead service providers, take
on large projects with large volumes and multiple locations and
services. They create the operational plans, requirements, and
specifications for the services and in turn select the best service
provider in each segment or function for each of the locations
and thus manage to offer the full range of logistics services to
the customer.
Normally in logistics the main players would be, that drive the
business, the freight forwarders, transport companies (generally only
in the long-haul segment), and warehousing service providers. In
many cases, shippers also own and manage warehousing facilities.
Freight forwarders are those agencies that consolidate the
freight and book the freight for onward freight with an airline or
shipping line, or use the ground transportation network including
rail services wherever required. Freight forwarders do not own all
means of transport. You book the seat with airlines and shipping
companies and negotiate the freight.
They play the key role in providing origin and destination
services in conjunction with single window client services using
CHAPTER
2
other third-party service providers. Most of them also have their

own customs clearance department to support ground logistics.
Without the support of the freight forwarders, who are multinational
companies capable of managing your SC with the ability to offer
services in any country and in any place around the world, the chain
cannot function efficiently, because it is impossible for companies
to coordinate and manage every section and activity in so many
locations and to manage so many suppliers and interfaces.
CHAPTER
2

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CHAPTER 2

2.1. BASIC FUNDAMENTALS OF LOGISTICS

2.1.1. Categories of Logistics

• System logistics includes the resources required to keep

2.1.2. Logistic Information System and its

• The use of information makes it possible for organizations

2.1.3. Analysis of Location in Logistics

Typical Management Questions:

2.2.1. Phase 1: Problem Definition and Planning

characteristics, the situational analysis describes:

• First: As part of logic development, logistics principles

• Service Improvements: In addition to enhancing

from secondary distribution centers, backorders for

networks. Planning must identify alternative solutions

current software makes simulation one of the most cost-

The complexity of analysis can be reduced by aggregating

• Analysis: The analyst uses the technique and data from

2.2.3. Phase 3: Recommendations &

1. Select the Best Alternative: To identify the two or three

and defining the sequence of completion is the role of

2.3. BUSINESS OBJECTIVES OF LOGISTICS

logistic system to achieve a desired level of customer service, i.e.,

Because inventory in a time-based system is typically

regulating the flow of products to market through judicious

need for maximum control when there is a potential health

goods. By investing in a warehouse, you will be able to

in color and texture. This also helps to extend the shelf

2.3.2. Logistics Activities and the Customer

information. As we have seen before, the traditional view of logistics

consider buying a car made to the customer’s expectations (with

Figure 2.1. Views

on customer proximity (throughput time and flexibility). Upstream

Figure 2.2. Five

Figure 2.3. Four

Source: https://www.fao org/3/a1369e/a1369e.pdf.

There are several elements that have an upstream or

Source: https://www. fao. org/3/a1369e/a1369e. pdf.

Currently, the general trend is to move CODP upstream in

2.4. EVOLUTION OF LOGISTICS AND SCM

The functions include:

and the environment. Logistics is more or less limited to the routine

2.4.1. Logistics – A Key Component of SCM Remember

distribution network design and development, and finished

2.4.2. Logistics Operations in Supply Chain

2.4.3. A Control Mechanism of Supply Chain

ERP software includes document formats as a critical component

2.4.4. A Tradeoff Between Efficiency and

According to Fisher, the problem with product availability in

The CODP and postponement concepts lead to logistical

sources of supply, unreliable suppliers, and more and more difficult

Figure 2.6. Different

• Efficient Supply Chains; Cost and information coordination

goal is to move the final assembly as far down the SC

2.4.5. Contract Logistics – Key Block in SCM

Take the case of the pharmaceutical industry. High manufacturing

In the case of automotive plants these warehousing activities

2.4.6. Logistics Service Providers keep Supply

With the emerging trends and the availability of 3PL providers,

other third-party service providers. Most of them also have their