CH-3 Role of Logistics in Supply Chains – Supply Chain Management: A Logistics Perspective : Book Guide

CHAPTER 3 ROLE OF LOGISTICS IN SUPPLY CHAINS LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Understand the contributions of logistics in improving organizational supply chains. • Appreciate how efficient and effective logistics management contributes to the vitality of the economy and improves global competitiveness. • Discuss the value-added roles of logistics on both a macro and micro level. • Explain the relationship between logistics and other important functional areas in an organization, including manufacturing, marketing, and finance and their unique contributions to efficiency and effectiveness. • Discuss the importance of management activities in the logistics function. • Analyze logistics systems from several different perspectives to meet different objectives. • Determine the total costs and understand the cost tradeoffs in a logistics system. CHAPTER OVERVIEW Introduction In spite of all the hype about the Internet, omni-channels, etc., successful organizations must manage order fulfillment effectively and efficiently for competitive advantage and profitability. Sophisticated front-end systems cannot stand alone in the competitive global marketplace of today – “back office” execution is critical for customer satisfaction. In fact, the speed of ordering via the Internet and other technologies exacerbates the need for an efficient and effective logistics system that can deploy appropriate levels of inventory, expedite completed orders to customers, and manage any returns. It is important to delineate more explicitly the relationship between logistics management and supply chain management. Supply chain management has been defined using a pipeline analogy, with the start of the pipeline representing the initial supplier and the end of the pipeline representing the ultimate customer. Another perspective on supply chain management is to view it as a connecting network of the logistics systems and related activities of all the individual organizations that are a part of a particular supply chain. What is Logistics? The term logistics has become much more widely recognized by the general public. In the last 20 years, television, radio, and print advertising have lauded the importance of logistics. Transportation firms, such as UPS, DHL, and FedEx, frequently refer to their organizations as logistics companies and stress the importance of their service to overall logistics success. The Persian Gulf War of the 1990s also contributed to increased recognition of logistics because CNN news commentators’ frequent mention of the logistics challenges associated with the 7,000-mile long supply pipeline to support the war effort in the Persian Gulf countries. Another factor contributing to the recognition of logistics has been increased customer sensitivity not only to product quality but also to the logistics service quality. Logistics management, as defined in this text, encompasses logistics systems not only in the private business sector but also in the public/government and nonprofit sectors. In addition, service organizations such as banks, hospitals, restaurants, and hotels have logistics challenges and issues, and logistics management is an appropriate and growing activity for service organizations. For the purposes of this text, the definition offered by the Council of Supply Chain Management Professionals (formerly the Council of Logistics Management) is the most appropriate. It states that logistics is ´ It states that logistics is “The art and science of management, engineering, and technical activities concerned with requirements, design, and supplying and maintaining resources to support objectives, plants, and operations.” Logistics management is the most widely accepted term and encompasses logistics not only in the private business sector but also in the public/government and nonprofit sectors. For the 21st century, logistics should be viewed as part of organizational management and has four parts: business, military, event, and service logistics. Each of these subdivisions has some common characteristics and requirements such as forecasting, scheduling, and transportation. • Business logistics: That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, service, and related information from point of use or consumption in order to meet customer requirements. • Military logistics: The design and integration of all aspects of support for the operational capability of the military forces (deployed or in garrison) and their equipment to ensure readiness, reliability, and efficiency. • Event logistics: The network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event. • Service logistics: The acquisition, scheduling, and management of the facilities/ assets, personnel, and materials to support and sustain a service operation or business. All four subdivisions have some common characteristics and requirements such as forecasting, scheduling, and transportation, but they also have some differences in their primary purpose. All four, however, can be viewed in a supply chain context; that is, upstream and downstream other organizations play a role in their overall success and long-run viability. Value-Added Roles of Logistics Five principle types of economic utility add value to a product or service. Included are form, time, place, quantity, and possession. Generally, production activities are credited with providing form utility; logistics activities with time, place, and quantity utilities; and marketing activities with possession utility. Each will be discussed briefly. Form or Transformation Utility: Form utility refers to the value added to goods through a manufacturing or assembly process. Place Utility: Logistics provides place utility by moving goods from production surplus points to points where demand exists. Time Utility: The economic value added to a good or service by having it at a demand point at a specific time when it is needed. Quantity Utility: Today’s business environment demands that products not only be delivered on time to the correct destination but also be delivered in the proper quantities. Possession Utility: Possession utility is primarily created through the basic marketing activities related to the promotion of products and services. Logistical Activities The logistics definition indicates activities a logistics manager could be responsible for. Below are some of those activities and what it encompasses: • Transportation involves the physical movement or flow of raw materials or finished goods and involves the transportation agencies that provide service to the firm. • Storage involves two closely related activities: inventory management and warehousing. A direct relationship exists between transportation and the level of inventory and number of warehouses required. It is important to examine the trade-offs related to the various alternatives in order to optimize the overall logistics system. • Packaging involves the necessary packaging needed to move the product to the market safely and securely. Logistics managers must analyze the tradeoffs between the type of transportation selected and its packaging requirements. • Materials Handling is important to efficient warehouse operation and concerns the mechanical equipment for short-distance movement of goods through the warehouse. • Inventory Control includes assuring appropriate levels of materials are available and certifying inventory accuracy. • Order Fulfillment consists of the activities involved with completing customer orders. Order fulfillment concerns the total lead time from when the order is placed to actual delivery in satisfactory condition. • Forecasting involves the prediction of inventory requirement and materials and parts essential to effective inventory control. • Production Planning concerns the determination of the number of units necessary to provide market coverage. The integration of production planning into logistics has become increasingly popular in large companies to effectively forecast and control inventory. • Procurement concerns the availability for production of needed parts, components, and materials in the right quantity, at the right time, at the right place, and at the right cost including within the logistics area if it more effectively coordinates and lowers costs for the firm. • Customer Service levels play an important part in logistics by ensuring the customer gets the right product, at the right time and place. Logistics decisions about product availability and inventory lead time are critical to customer service. • Facility Location is concerned with optimizing the time and place relationships between plants and markets, or between supply points and plants. Site location impacts transportation rates and service, customer service, inventory requirements, and possible other areas. • Other activities: Parts and service support is concerned with maintaining an adequate channel to anticipated repair needs. Salvage and scrap disposal deals with reverse logistics systems and channels in order to effectively and efficiently dispose of containers and other scrap at the end of the distribution channel. Logistics in the Economy: A Macro Perspective The overall, absolute cost of logistics on a macro basis will increase with growth in the economy. In other words, if more goods and services are produced, logistics costs will increase. To determine the efficiency of the logistics system, total logistics costs need to be measured in relationship to gross domestic product (GDP), which is a widely accepted barometer used to gauge the rate of growth in the economy. In 2014, logistics related costs accounted for 8.3% of GDP and totaled $1,449 billion. This was an increase of 3.1% from the previous year due to increases in inventory costs, warehousing costs, and transportation cost due to growth in the economy. The reduction in logistics cost as a percent of GDP has resulted from a significant improvement in the overall logistics systems of the organizations operating in the economy. This reduction in relative cost allows organizations to be more competitive since it directly impacts the cost of producing goods. Some additional understanding of logistics costs can be gained by examining the three major cost categories – warehousing and inventory costs, transportation costs, and other logistical costs. Warehousing costs are those associated with the assets used to hold inventory. Inventory costs are all the expenses associated with holding goods in storage. Carrying costs include interest expense (or the opportunity cost associated with the investment in inventory), risk-related costs (obsolescence, depreciation), and service-related costs (insurance, taxes). Transportation costs are the total national expenditures for the movement of freight in the United States. The third category of logistics costs is the administrative and shipper-related costs associated with managing logistics activities and personnel. The declining trend for logistics cost relative to GDP is very important to recognize. It was related to the deregulation of transportation, which permitted much more flexibility for carriers to purchase transportation services and allowed more flexibility for carriers to adjust their freight rates and service in response to competition. A second factor contributing to the trend has been the improved management of inventory levels with more attention being focused on inventory investment and the technology available to managers to make more effective inventory decisions. Finally, the focus by many organizations on cash flow resulted in more emphasis on inventory turnover. Logistics in the Firm: The Micro Dimension The micro dimension of logistics examines the relationships between logistics and other functional areas in an organization – marketing, manufacturing or operations, finance and accounting, and others. Logistics Interfaces with Manufacturing or Operations Manufacturing efficiency is often based upon long production runs or scale with infrequent manufacturing line setups or changeovers. The long run can result in higher inventory levels of inventory for some finished products and limited supplies of others. The best or optimal manufacturing decisions require managers to analyze the cost trade-offs of longer production runs and their impact on inventory cost. Shorter production runs with more efficient set-ups can provide flexibility to meet short run changes in demand. Logistics and manufacturing also interface on the inbound side of production. For example, a shortage or stock-out could result in the shutdown of a manufacturing facility and an increase in production costs. The logistics manager should ensure that available quantities of raw materials and components are adequate to meet production schedules yet are conservative in terms of inventory carrying costs. Another activity at the interface of logistics and manufacturing is industrial packaging, which many organizations treat as a logistics responsibility. In the context of manufacturing or logistics, the principal purpose that industrial packaging serves is to protect the product from damage. The interface between logistics and manufacturing is becoming more critical, given the growth in procurement of raw materials and components from offshore sources and sustainability issues. Also, many organizations today are making arrangements with third-party manufacturers, “co- packers,” or contract manufacturers to produce, assemble, or enhance some or all of the organization’s finished products. T Logistics Interfaces with Marketing Logistics has an important relationship with marketing that also necessitates collaboration. The rationale is that physical distribution, or the outbound side of an organization’s logistics system, plays an important role in the sale of a product. In some instances, order fulfillment may be the key variable in the continuing sales of products; that is, the ability to provide the right product at the right time to the right place in the right quantities and the right cost can be the critical element in making a sale. This section discusses the interfaces between logistics and marketing activities in each principal area of the so-called marketing mix – price, product, promotion, and place. Price: From a logistics perspective, adjusting quantity prices to conform to shipment sizes appropriate for transportation organizations might be quite important. Product: Another decision frequently made in the marketing area concerns products, particularly their physical attributes. These changes impact container size and hence container utilization and storage space requirements. Promotion: Firms often spend millions of dollars on national advertising campaigns and other promotional practices to improve sales. An organization making a promotional effort to stimulate sales should inform its logistics manager so that sufficient quantities of inventory will be available for distribution to the customer. Marketing can either “push” the product through the distribution channel to the customer or “pull” it through. Place: The place decision refers to the distribution channels decision, and thus involves both transactional and physical distribution channel decisions. Recent Trends: The most significant trend is that marketers recognize the strategic value of place in the marketing mix and the increased revenues and customer satisfaction that might result from excellent logistics service. As a result, many organizations have recognized customer service as the interface activity between marketing and logistics and have aggressively and effectively promoted customer service as a key element of the marketing mix. Logistics Interfaces with Other Areas While manufacturing and marketing are probably the two most important internal, functional interfaces for logistics in a product-oriented organization, there are other important interfaces. The finance and accounting areas have become increasingly important during the last decade. The impact that logistics and supply chain management can have upon return on assets (ROA) or return on investment (ROI) is very significant. Logistics can positively impact ROA in several ways. First, inventory is both a current asset on the balance sheet and a variable expense on the income statement. Reducing inventory levels reduces the asset base as well as the corresponding variable expenses, thus having a positive impact on ROA. Second, transportation and warehousing costs can also influence ROA. If an organization owns its warehouses and transportation fleet, they are fixed assets on the balance sheet. If these assets are reduced or eliminated, ROA should increase. Similarly, if an organization utilizes 3PL’s for warehousing and transportation, variable expenses and asset levels will usually be impacted. Finally, the focus on customer service can increase revenue. As long as the incremental increase in revenue is larger than the incremental increase in the cost of customer service, ROA will increase. Accounting is also an important interface for logistics. Accounting systems are critical for providing appropriate cost information for analysis of alternative logistics options. The recent interest in customer profitability and the related cost accounting systems such as activity-based costing (ABC) has been beneficial to improving the quality of logistics data and analyses. Accounting systems are also critical for measuring supply chain tradeoffs and performance. Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics This section deals with specific factors relating to the cost and importance of logistics. Competitive Relationships Frequently, competition is narrowly interpreted only in terms of price competition. While price is certainly important, in many markets, customer service can be a very important form of competition. • Order Cycle: A well-accepted principle of logistics management is that order cycle length directly affects inventory levels. Stated another way, the shorter the order cycle, the less inventory required to be held by the customer. Order cycle can be defined as the time that elapses from when a customer places an order until the order is received. • Substitutability: Substitutability very often affects the importance of customer service. If a product is similar to other products, consumers may be willing to substitute a competitive product when a stock-out occurs. • Inventory Effect: By increasing inventory costs (either by increasing the inventory level or by increasing reorder points), organizations can usually reduce the cost of lost sales. In other words, an inverse relationship exists between the cost of lost sales and inventory cost. • Transportation Effect: Organizations can usually trade off increased transportation costs against decreased lost sales costs. Product Relationships A number of product-related factors affect the cost and importance of logistics. Among the more significant of these are dollar value, density, susceptibility to damage, and the need for special handling. • Dollar Value: The value of a product typically affects warehousing, inventory, and transportation costs. • Density: Another factor that affects logistics cost is density, which refers to the weight/space ratio of the product. • Susceptibility to Damage: The third product factor affecting logistics cost is susceptibility to damage. The greater the risk of damage to a product, the higher the transportation and warehousing cost. • Special Handling Requirements: Some products might require specifically designed equipment, refrigeration, heating, or strapping, which entail higher costs. Spatial Relationships A final topic that is extremely significant to logistics is spatial relationships, the location of fixed points in the logistics system with respect to demand and supply points. Spatial relationships are very important to transportation costs, since these costs tend to increase with distance. Logistics and Systems Analysis A system is a set of interacting elements, variables, parts, or objects that are functionally related to one another and the form a coherent group. The general tenet of the systems concept is that the focus is not on individual variables but on how they interact as a whole. The objective is to operate the whole system efficiently and effectively, not just the individual parts. Techniques of Logistics System Analysis In this section, total cost analysis techniques for logistics are discussed. Only the more basic models are examined. Short-Run/Static Analysis One general approach to total cost analysis for logistics is known as short-run analysis. In a short-run analysis, a specific point in time or level of production is chosen, and costs are developed for the various logistics cost centers described previously. Long-Run/Dynamic Analysis While short-run analysis concentrates on specific time or level of output, dynamic analysis examines a logistics system over a long time period or range of output. Approaches to Analyzing Logistics Systems The analysis of logistics systems frequently requires different views or perspectives of logistics activities. The best perspective to take depends on the type of analysis that is needed. For example, if an organization wants to analyze the long-run design of its logistics system, a view of logistics that focuses on the organization’s network of node and link relationships would probably be most beneficial. On the other hand, if an organization is evaluating a change in a carrier or mode of transportation, it should probably analyze the logistics system in terms of cost centers. In this section, four approaches to analyzing logistics systems are discussed: (1) materials management versus physical distribution, (2) cost centers, (3) nodes versus links, and (4) logistics channels. Materials Management versus Physical Distribution The classification of logistics into materials management and physical distribution (inbound and outbound logistics) is very useful to logistics management or control in an organization. Frequently, the movement and storage of raw materials in an organization is different from the movement and storage of finished goods. Cost Centers Logistics usually includes transportation, warehousing, inventory, materials handling, industrial packaging, etc. By examining these activities as cost centers, tradeoffs between them can be analyzed to determine the overall lowest cost or highest service logistics system, which represents a second approach to logistics system analysis. Nodes versus Links A third approach to analyzing logistics systems in an organization is in terms of nodes and links. The nodes are fixed spatial points where goods stop for storage or processing. Links represent the transportation network and connect the nodes in the logistics system. The network can be composed of individual modes of transportation (rail, motor, air, ocean, or pipeline) and of combinations and variations. From a node-link perspective, the complexity of logistics systems can vary enormously. A node system might use a simple link from suppliers to a combined plant and warehouse and then to customers in a relatively small market area. At the other end of the spectrum are large, multiple- product organizations with multiple plant and warehouse locations. The complex transportation networks of the latter can include three or four different modes and perhaps private as well as for-hire transportation. The node-link perspective, in allowing analysis of a logistics system’s two basic elements, represents a convenient basis for seeking possible system improvements. As has been noted, the complexity of a logistics system often relates directly to the various time and distance relationships between the nodes and the links and to the regularity, predictability, and volume of flow of goods entering, leaving, and moving within the system. Logistics Channels A final approach to logistics system analysis is the logistics channel, or supply chain of network organizations engaged in transfer, storage, handling, communication, and other functions that contribute to the efficient flow of goods. The logistics channel can be simple or complex. A simple channel in which an individual producer deals directly with a final customer, is relatively simple. The individual manufacturer controls the logistics flow since it deals directly with the customer. A more complex, multi-echelon channel, with a market warehouse and retailers creates a situation where control is more difficult because of the additional storage and transportation provided by third-party organizations. SUMMARY • Logistics developed as an important area of business after World War II with several phases of development. • Logistics has become an important part of supply chain management. The coordination and integration of the logistics systems of the organizations in a supply chain facilitate the successful management of supply chains. • While there are a number of different definitions for logistics, the definition developed by the Council of Supply Chain Management Professionals is the primary definition used in this text. • Logistics is an area of management that has four sub-disciplines: business, military, service, and event. • On a macro basis, logistics-related costs have helped the U.S. economy maintain its competitive position on a global basis. • Logistics adds place, time, and quantity utilities to products and enhances the form and possession utilities added by manufacturing and marketing. • Logistics has an important system relationship to manufacturing, marketing, finance, and other areas of the organization which aids in making organizations more efficient and effective. • Logistics activities, including transportation, inventory, warehousing, materials handling, industrial packaging, customer service, forecasting, and others are important components of supply chains. • Logistics systems can be viewed or analyzed in several different ways including materials management versus physical distribution, cost centers, nodes versus links, and channels. All four approaches are viable for different purposes. • Logistics is frequently analyzed from a systems approach, which emphasizes cost and service tradeoffs when changes are proposed. Either a short or a long-run perspective can be used. • The cost of logistics systems can be affected by a number of major factors, including competition in the market, the spatial relationship of nodes, and product characteristics. ANSWERS TO STUDY QUESTIONS 1. Provide a definition of logistics and a rationale for why is it important in private companies and public organizations? The definition offered by the Council of Supply Chain Management Professionals is the most appropriate. It states that logistics is “The art and science of management, engineering, and technical activities concerned with requirements, design, and supplying and maintaining resources to support objectives, plants, and operations. The often-quoted adage “Good logistics is business power” is appropriate because logistics helps to build customer loyalty. If an organization cannot get its products to customers in a timely manner, it will not stay in business very long. This is not to say that quality products and effective marketing are not important, but they must be combined with effective and efficient logistics systems for long-run success and financial viability. The challenge is to manage the entire logistics system in such a way that order fulfillment meets and perhaps, exceeds customer expectations. At the same time, the competitive marketplace demands efficiency – controlling transportation, inventory, and other logistics-related costs. Cost and service tradeoffs must be considered when evaluating customer service levels and the associated total cost of logistics, but both goals – efficiency and effectiveness – are important to an public and private organization in today’s competitive environment. 2. Explain the importance of logistics important on a macro level and the contributions of logistics to the economy? The overall cost of logistics on a macro basis increases with growth in the economy. In other words, if more goods and services are produced, total logistics costs will increase. To determine the efficiency of the logistics system, the total logistics costs need to be measured in relationship to gross domestic product (GDP), which is a widely accepted barometer used to gauge the rate of growth in the economy. In 2014, logistics related costs accounted for 8.3% of GDP and totaled $1,449 billion. This was an increase of 3.1% from the previous year due to increases in inventory costs, warehousing costs, and transportation cost due to growth in the economy. 3. How does logistics add value in the economy? How does logistics add value for firms? What, if any are the differences? Five principle types of economic utility add value to a product or service. Included are form, time, place, quantity, and possession. Generally, production activities are credited with providing form utility; logistics activities with time, place, and quantity utilities; and marketing activities with possession utility. Form or Transformation Utility refers to the value added to the goods through a manufacturing or assembly process. For example, such utility results when raw materials or components are combined in some predetermined manner to produce a finished product. This is the case, for example, when Dell combines components along with software to assemble a computer to a customer’s specifications. The process of combining these different components represents a change in the product form that adds value to the finished product. Place Utility Logistics provides place utility by moving goods from production points to markets WHERE demand exits. Logistics extends the physical boundaries of the market area, thus adding economic value to the goods. Logistics creates place utility primarily through transportation. For example, moving Huggies diapers from a Kimberly-Clark manufacturing facility in Wisconsin by motor carrier to markets where consumers need these diapers creates place utility. The market boundary extension, added by place utility, increases competition, which often leads to lower prices and increased profit opportunities through economies of scale. Time Utility Not only must goods and services be available where customers need them but also at the time when customers or need them. Time utility is the economic value added to a good or service by having it at a demand point at a specific time when it is needed. Logistics creates time utility through proper inventory maintenance, the strategic location of goods and services, and transportation. For example, having heavily advertised products and sale merchandise available in retail stores at the time promised in the advertisement or being able to supply products when there is an emergency are good examples of time utility. Time utility is much more important today because of the emphasis on reducing lead time and minimizing inventory levels through logistics-related strategies to improve cash flow. Quantity Utility Today’s global competition requires that products not only be delivered on time to the correct destination but also be delivered in the correct quantities to minimize inventory cost and prevent stock-outs The utilities of when and where must be accompanied by how much. Delivering the proper quantities of an item to where it is demanded provides quantity utility. For example, assume that General Motors will be assembling 1,000 automobiles on a given day and is using a JIT inventory strategy. This will require that 5,000 tires be delivered to support the automobile production schedule. Assume that tire supplier only delivers 3,500 tires on time at the correct location. Even though the when and where utilities are created, the how much utility is not. Thus, GM will not be able to assemble the 1,000 cars as planned. Logistics must deliver products at the right time, to the right pace, and in the right quantities to add utility and economic value to a product. All three are obviously interrelated. Possession utility is primarily created through the basic marketing activities related to the promotion and sales of products and services. Promotion can be defined as the effort, through direct and indirect contact with the customer, to increase the desire to possess a good or benefit from a service. The role of logistics in the economy is related to and supports possession utility; time, place, and quantity utilities make sense only if demand for the product of service exists. Marketing also depends on logistics, since possession utility cannot be accomplished unless time, place, and quantity utilities are provided. 4. Explain the relationship between logistics and supply chain management? The concepts of supply chain management and logistics must be compared or, more appropriately, related to each other. Supply chain management is defined using a pipeline analogy with the start of the pipeline representing the initial supplier and the end of the pipeline representing the ultimate customer. In other words, it was an extended set of enterprises from the supplier’s supplier to the customer’s customer. Another perspective on supply chain management views it as a network of the logistics systems and related activities of all the individual organizations that are a part of a particular supply chain. The individual logistics systems obviously play a role in the success of the overall supply chain. The coordination or integration of the logistics systems in a supply chain is a challenge; no logistics system operates in a vacuum. For example, the inbound part of a manufacturer’s logistics system interfaces with the outbound side of the supplier’s logistics system. The outbound portion of the manufacturer’s logistics system interfaces with the inbound side of its customer’s logistics system. 5. Compare and contrast the four major subdivisions of logistics discussed in this chapter. In the 21st century, Logistics should be viewed as a part of management that has four subdivisions: • Business logistics: That part of the supply chain that plans, implements, and controls the effective, efficient forward and reverse flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customer requirements. • Military logistics: The design and integration of all aspects of support for the operational capability of the military forces [deployed or in garrison] and their equipment to ensure readiness, reliability, and efficiency. • Event Logistics: The network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event. • Service Logistics: The acquisition, scheduling, and management of the facilities/assets, personnel, and materials to support to sustain a service operation or business. All four subdivisions have some common characteristics and requirements such as forecasting, scheduling, and transportation, but they also have some differences in their primary purpose. All four, however, can be viewed in a supply chain context; that is, upstream and downstream other organizations play a role in their overall success and long-run viability. Having offered definitions of logistics, it is now appropriate to discuss how logistics adds value to an organization’s products 6. Discuss the relationship between manufacturing and logistics. What are the tradeoffs between the two areas? A classic interface between logistics and manufacturing relates to the length of the production run. Manufacturing efficiency is often based upon long production runs or scale with infrequent manufacturing line setups or changeovers. The long run can result in higher inventory levels of inventory for some finished products and limited supplies of others. The best or optimal manufacturing decisions require managers to analyze the cost trade-offs of longer production runs and their impact on inventory cost. Shorter production runs with more efficient set-ups can provide flexibility to meet short run changes in demand. The current trend toward “pull” systems where the product is “pulled” in response to demand as opposed to be “pushed” in advance of demand necessitates such flexibility. This practice lowers inventory levels, which can lower total logistics costs even though production costs may increase. The production manager is also interested in minimizing the inventory impact of seasonal products. For example, the candy industry is affected by several holidays or events, namely, Valentine’s Day, Easter, Back-to School purchases, Halloween, and Christmas. To minimize manufacturing cost and potential stockouts, production managers usually produce in advance of the holiday or event. This strategy requires accumulating inventory and the associated costs. The manufacturing cost savings should be traded off against the inventory costs and other related benefit or costs. Logistics and manufacturing also interface on the inbound side of production. For example, a shortage or stock-out could result in the shutdown of a manufacturing facility and an increase in production costs. The logistics manager should ensure that available quantities of raw materials and components are adequate to meet production schedules yet are conservative in terms of inventory carrying costs. Because of the need for this type of coordination, many organizations today have shifted the responsibility for production scheduling from manufacturing to logistics. Another activity at the interface of logistics and manufacturing is industrial packaging, which many organizations treat as a logistics responsibility. In the context of manufacturing or logistics, the principal purpose that industrial packaging serves is to protect the product from damage. This is distinct from whatever value the consumer packaging might have for marketing or promotional reasons. The interface between logistics and manufacturing is becoming more critical, given the growth in procurement of raw materials and components from offshore sources and sustainability issues. Also, many organizations today are making arrangements with third-party manufacturers, “co- packers,” or contract manufacturers to produce, assemble, or enhance some or all of the organization’s finished products. These arrangements are especially prevalent in the food industry where some manufacturers produce food items to be sold under someone else’s label. Management of global supply chains is intensifying the importance of the need for collaboration between logistics and production. 7. Physical distribution has a special relationship to marketing. What is the nature of the relationship between logistics and marketing? Is the relationship becoming more or less important? Why? Logistics is sometimes referred to as the other half of marketing. The rationale for this definition is that the physical distribution or outbound side of an organization’s logistics system is responsible for the physical movement and storage of products for customers and thus plays an important role in selling a product. In some instances, physical distribution and order fulfillment might be the key variables in selling a product; that is, the ability to provide the product at the right time to the right place in the right quantities might be the critical element in making a sale. Today, logistics is related to all four Ps of marketing—price, product, promotion, and place. The most significant trend is that marketers recognize the strategic value of place in the marketing mix and the increased revenues and customer satisfaction that might result from excellent logistics service. As a result, many organizations have recognized customer service as the interface activity between marketing and logistics and have aggressively and effectively promoted customer service as a key element of the marketing mix. Organizations in such industries as food, chemicals, pharmaceuticals, and technology have reported considerable success with this strategy to improve efficiency and effectiveness. 8. Logistics encompasses a relatively large number of managerial activities. Discuss five of these activities and why they are important to logistics systems. Transportation involves the physical movement or flow of raw materials or finished goods and involves the transportation agencies that provide service to the firm. Storage involves two closely related activities: inventory management and warehousing. A direct relationship exists between transportation and the level of inventory and number of warehouses required. It is important to examine the trade-offs related to the various alternatives in order to optimize the overall logistics system. Packaging involves the necessary packaging needed to move the product to the market. Logistics managers must analyze the trade-offs between the type of transportation selected and its packaging requirements. Materials handling is important to efficient warehouse operation and concerns the mechanical equipment for short-distance movement of goods through the warehouse. Order fulfillment consists of the activities involved with completing customer orders. Order fulfillment concerns the total lead time from when the order is placed to actual delivery in satisfactory condition. Forecasting involves the prediction of inventory requirement and materials and parts essential to effective inventory control. Production planning concerns the determination of the number of units necessary to provide market coverage. The integration of production planning into logistics has become increasingly popular in large companies to effectively forecast and control inventory. Purchasing concerns the availability for production of needed parts, components, and materials in the right quantity, at the right time, at the right place, and at the right cost. Purchasing is included within the logistics area if it more effectively coordinates and lowers costs for the firm. Customer service plays an important part in logistics by ensuring the customer gets the right product at the right time and place. Logistics decisions about product availability and inventory lead time are critical to customer service. Site location is concerned with creating the time and place relationships between plants and markets, or between supply points and plants. Site location impacts transportation rates and service, customer service, inventory requirements, and possible other areas. 9. Why do companies analyze their logistics systems from perspective of nodes and links? From a node-link perspective, the complexity of logistics systems can vary enormously. A node system might use a simple link from suppliers to a combined plant and warehouse and then to customers in a relatively small market area. At the other end of the spectrum are large, multiple- product organizations with multiple plant and warehouse locations. The complex transportation networks of the latter can include three or four different modes and perhaps private as well as for-hire transportation. The node-link perspective, in allowing analysis of a logistics system’s two basic elements, represents a convenient basis for seeking possible system improvements. As has been noted, the complexity of a logistics system often relates directly to the various time and distance relationships between the nodes and the links and to the regularity, predictability, and volume of flow of goods entering, leaving, and moving within the system. 10. What product characteristics affect logistics costs? Discuss the effects of these characteristics on logistics costs. A number of product-related factors affect the cost and importance of logistics. Among the more significant of these are dollar value, density, susceptibility to damage, and the need for special handling. Dollar Value The product’s dollar value typically affects warehousing costs, inventory costs, transportation costs, packaging costs, and even materials-handling costs. As the product’s dollar value increases, the cost in each identified area also increases. Transportation prices reflect the risk associated with the movement of goods, and higher value products are often more susceptible to damage and loss and/or require more care in the movement. Transportation providers may also charge higher prices for higher-value products since these customers may be willing to pay higher rates for transportation service. Warehousing and inventory costs also increase as the dollar value of the product increases. Higher value means more working capital invested in inventory, resulting in higher total capital costs. In addition, the risk factor for storing higher-value products increases the costs of obsolescence and depreciation. Also, since the physical facilities required to store higher-value products are more sophisticated, warehousing costs increase with higher dollar value products. Packaging costs also usually increase because the organization uses protective packaging to minimize potential damage to the product. An organization spends more effort in packaging a product to protect it from damage or loss if it has higher value. Finally, materials-handling equipment used to meet the needs of higher-value products is very often more sophisticated. Organizations are usually willing to use more capital-intensive and expensive equipment to speed higher-value goods through the warehouse and to minimize the chance of damage. Density This refers to the weight/space ratio of the product. An item that is lightweight compared to the space it occupies has low density. Density affects transportation and warehousing costs. As density increases for an item, its transporting and warehousing costs decrease. When establishing their prices, transportation providers consider how much weight they can fit into their vehicles, since they quote their prices in dollars and cents per hundred pounds. Therefore, on high-density items, providers can charge a lower price per hundred pounds because they can fit more weight into their vehicle. Susceptibility to Damage The third product factor affecting logistics cost is susceptibility to damage. The greater the risk of damage to a product, the higher the transportation and warehousing cost. Because of a higher degree of risk and liability associated with more fragile goods, higher are prices charged by both transportation and warehousing providers. These providers might also charge higher prices because of measures they must take to prevent product damage. Special Handling Requirements A fourth factor is special handling requirements for products. Some products might require specifically designed equipment, e.g., refrigeration, heating, or strapping. These special requirements will usually increase warehousing, transportation, and packaging costs. Case Studies CASE 3.1 JORDANO FOOD PRODUCTS 1. What is your overall evaluation of the potential for Jordano Fodds in this new relationship with SAB? Explain your position. Similar to the Central Transport Case, this situation provides an opportunity for Jordano Foods to grow their organization in the new era of collaborative supply chains. It seems obvious that SAB is at a crossroad with its development and growth and this relationship could help Susan Weber thwart the takeover of SAB by outside investors. Such a takeover could have a negative Impact on Jordano since they could lose SAB as a customer. It is a major opportunity for Tracie Shannon to demonstrate why logistics is an important factor contributing to the future success of Jordano Foods . The types of collaborative relationships require detailed analyses of the related costs and the shared benefits. There is not sufficient information to do this type of analysis nor would it be appropriate at this stage of the course. The “case” for or against has to be made on the basis of a general understanding of the changes taking place in logistics and supply chains. Given that, the case can be made for a collaborative relationship. More specifically, supply chains function well with collaborative relationships where there is a need for both parties to work together to address the challenges they face. Both Jordano and SAB are facing a challenge if there is a buyout SAB. Jordano may lose a good customer and the personnel in SAB could lose their positions in the takeover. There appear to be some good reasons for them to cooperate. 2. What areas of logistics do you think have the most potential for Jordano and SAB to collaborate for the benefit of SAB’s customers? Why? Given the somewhat limited information that is presented in the case, it would appear that transportation, warehousing and inventory management could be the basis of a mutually beneficial relationship. The case mentions that Tracie was brought in to improve Jordano’s logistics function which had not received as much attention as production and marketing which is not unusual in smaller companies. SAB has demonstrated that they have some expertise in these areas. The addition of Central Transport to the relationship will enhance that ability. Their overall ability in order fulfillment should be enhance with better service and lower cost to the final customer. The retailers that SAB markets to should be more competitive with this type of relationship. It appears to have the potential for a win-win-win collaborative effort based on need and potential. They have a working relationship already that shouls be able to be enhanced. CASE 3.2 Senco Electronics Company: A Sequel 1. If you were Skip Grenoble, which alternative would you advise Jim Beierlein to implement? What criterial would you use to arrive at your decision? If the decision was to be based simply upon total costs, the data presented in the case indicates that at their current level of demand which is based upon a shipment weight of 2,500,000 pounds, the lowest total cost would be by air at $800,000 even though air is the high cost alternative based upon transportation cost alone ($290,000 vs. $150,000). Given the more reliable and shorter transit time of the air alternative, at this level of demand Skip should recommend air transport 2. At what level of demand would the two alternatives be equal? This can be answered using simultaneous equations using the fixed costs of each mode and their variable cost per unit as follows: (Y = a + bx) Y = cost; A= fixed cost; Bx= variable cost per unit Air--$450,000 + .14x Ocean--$600,000 + .09x 450,000 + .14x= $600,000 + .09x .14x-.09x=600,000-450,000 .05x=150,000 X=3,000,000 lbs. At 300,000 pounds the total cost would be equal 3. GRAPH $0 $2,00,000 $4,00,000 $6,00,000 $8,00,000 $10,00,000 $12,00,000 $14,00,000 20,00,000 30,00,000 4000000 5000000 Chart Title Air Ocean 4. As indicated by the equilibrium point solution, ocean would be the best choice after about three years of forecasted growth ( based upon Senco’s total cost). However, Senco should give some consideration to the costs of their customers related transit time and reliability which would impact inventory costs of their customers. Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975