MANAGEMENT SCIENCE DEPARTMENT

1. MANAGEMENT SCIENCE DEPARTMENT DPS 306 Logistics and Transportation Management

2. Real You get into your supermarket of choice to pick a certain item. "It's out of stock," a supermarket employee tells you. Actually, several people have been looking for it... must be a popular item," s/he adds. Why was this product out-of-stock? So, if that item had been in the “supaa”, how would it have gotten there?

3. Introduction In today's highly competitive global marketplace, the pressure on organizations to find new ways to create value and deliver it to their customers grows ever stronger. Consequently, many organizations in the last two decades, have moved the logistics function to the center stage.

4. Introduction – Cont ... There has been a growing recognition that effective Logistics Management (LM) throughout the firm and Supply Chain (SC) can greatly assist in the goal of cost reduction and service enhancement. The keys to success in LM require heavy emphasis on integration of activities, cooperation, coordination and information sharing throughout the firm and the entire supply chain, from suppliers to customers.

5. Logistics Defined Traces its origin to: Greek word logistikos Latin word logisticus Meaning the science of computing and calculating. In ancient times, the term was frequently used in connection with moving armies and supplies of food and armaments to the war front. Its use can be traced back to 17th Century in French army.

6. Logistics Defined – Cont ... It gained importance in army operations during WWII as it was used in reference to movement of supplies, men, and equipment across the border. The US army officially used the word after WWII. Today logistics has acquired a wider meaning and is used in business to refer to movement of raw materials from suppliers to the manufacturer and finished goods to the consumers.

7. Just a thought!!!! What is Logistics = Logical thinking + Statistics

8. Definitions – Cont… Logistics refers to the movement of materials within a production facility and to incoming (inbound/upstream) and outgoing(outbound/downstream) shipments of goods and materials. (William J. Stevenson)

9. Definitions – Cont... “Logistics is that part of SCM that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and point of consumption in order to meet customers’ requirements.” (Council of Supply Chain Management Professionals)

10. Logistics vs Transportation Clearly there is an explicit difference between logistics and transportation. The term logistics is often misinterpreted to mean transportation. In fact, the scope of logistics goes well beyond transportation. Logistics forms the system that ensures the delivery of the product in the entire SC. This includes transportation, packaging, storage and handling methods, and information flow.

11. Logistics vs Transportation – Cont.. Transportation refers to the means of distributing goods, supplies, resources, info, people, and energy from the original point to the destination point using a mode of transport. Since transportation is concerned only with moving the supplies, someone has to take care of handling, packaging, managing the time the goods are fetched and delivered, and maintaining coordination, especially incases where inter-modal transport is used. That's when logistics comes in.

12. Logistics vs SCM Some authors regard SCM and Logistics as synonymous. Cooper (1997) regards Logistics as concerned with material and material flows and SCM as the integration of all business processes across the supply chain. According to the UK Institute of Logistics and Transport: LM makes possible the optimized flow and positioning of goods, materials,

13. Logistics vs SCM – Cont... information and all resources of an enterprise. SC is the flow of materials through procurement, manufacture, distribution, sales and disposal, together with the associated transport and storage. SCM views the SC as a single entity and thus demands system integration.

14. Activities of Logistics As materials move through an organization, the following activities are normally included in Logistics: • Procurement or purchasing– material flow through an organization is initiated when procurement sends a purchase order to a supplier. • Inward transport or traffic– moves materials from suppliers to the firm’s receiving area. • Receiving – ensures materials delivered correspond to the order, acknowledges receipt, unloads delivery vehicles, inspects materials for damage and sorts them.

15. Activities of Logistics – Cont... • Warehousing or stores – moves materials into storage, and takes care of them until they are needed. • Stock control – sets inventory policies. Considers the materials to store, overall investment, customer service, stock levels, order sizes, and timing. • Order picking – finds and removes materials from stores to the departure area. • Materials handling – moves materials, within short journeys, through the operations within an organization.

16. Activities of Logistics – Cont... • Outward transport – takes materials from the departure area and delivers them to customers. • Physical distribution management – delivers FGs to customers, including outward transport. Is aligned to marketing and forms an important link with downstream activities. • Recycling, returns and waste disposal – reverse logistics or reverse distribution. • Location – moving materials nearer to place of need. • Communication – alongside flow of materials, logistics facilitates flow of info.

17. Aims of Logistics Logistics managers have two main aims: • Customer responsiveness - success of an organization depends on its ability to satisfy customers. • Move materials into, through, and out of their own organization as efficiently as possible i.e focus on minimizing costs. The challenge however is that outstanding customer service requires more resources which come with higher costs.

18. Aims of Logistics – Cont... Thus a realistic aim for Logistics is to balance the achievement of customer satisfaction with the cost of achieving it. This balance can be phrased in terms of perceived customer value. Logistics adds value by making products available in the right place and at the right time. If a product is available at the place needed,

19. Aims of Logistics – Cont... Logistics is said to have added place utility; if it is delivered at the right time, Logistics has added time utility.

20. Importance of Logistics • Helps move a country's economy i.eit is an essential feature of all economic activity. • Provides the wheels that help bring in and distribute goods and materials within an economy. There are few aspects of human activity that do not ultimately depend on the flow of goods. Without Logistics, no materials move, no operations can be done, no products are delivered, no customers served, and hence no economy.

21. Importance of Logistics – Cont... Logistics is not only essential, but it is also expensive. Organizations are known to reduce their overheads significantly, but they are left with surprisingly high Logistics costs. Being expensive, Logistics has impact on overall financial performance. Logistics affects customer satisfaction, operating costs, profit etc

22. Importance of Logistics – Cont... Poor Logistics are the cause of roughly 50% of all customer complaints. No organization can expect to prosper if it ignores Logistics and organizing Logistics can give huge competitive advantage. We can, then, summarize the importance of Logistics by saying that it:

23. Importance of Logistics – Cont... • is essential, as all organizations, even those offering intangible services, rely on movement of materials. • is expensive, with costs often forming a surprisingly high portion of turnover. • directly affects profits and other measures of organizational performance. • has strategic importance with decisions affecting performance over the long term. • forms links with suppliers, developing mutually beneficial, long-term trading relationships.

24. Importance of Logistics – Cont... • forms links with customers, contributing to customer satisfaction and added value • has a major effect on lead time, reliability and other measures of customer service • determines the best size and location of facilities • can be risky, because of safety, health and environmental concerns • can encourage growth of other organizations – such as suppliers and intermediaries offering specialized services

25. Integrating LogisticsProgress in Logistics -Historically, firms put all their effort into making of products & put little thought to the associated movement of materials. -Transport & storage were seen as unavoidable costs of doing business not worth much attention. -The main reason for change was the recognition that Logistics was expensive (1970s & 80s surveys were showing that it accounted for 15-20% of revenue). -As a high cost function, managers believed significant savings could be made.

26. Pressures to improve Logistics As well as potential savings, many other factors put pressure to organizations to improve their Logistics: -More knowledgeable customers, demand higher quality, lower costs and better service. -Fiercer competition & thus organizations must look at every opportunity to remain competitive. -Changes in retail markets e.g growth of 24-hour opening, home deliveries, telephone & online shopping -International trade continues to grow (EU, EAC, NAFTA) -Recognition of the strategic importance of Logistics.

27. Pressures - Cont... -New operations e.g JIT, lean operations, time compression, flexible manufacturing, mass customization, virtual operations & so on. -Turn from a product focus to a process focus. This needs improvement in operations, including Logistics. -Considerable improvement in communication e.g EDI, EFT(M-pesa?), e-commerce etc -Outsourcing of peripheral activities (Logistics) and concentrating on core operations. -Increased co-operation through alliances and partnerships. This is important for Logistics, which is usually the main link between organizations in a SC.

28. Pressures – Cont... -Attitudes towards transport are changing, because of increased congestion on roads, concerns about air quality and pollution, broader environmental issues, privatization of rail services, deregulation of transport, and a host of other changes. N/B: There are many other pressures including uncertain market conditions, political change, shortage of skilled staff, fluctuating exchange rates, and so on. How will(has) Logistics respond(ed) to these pressures?

29. Integrating Logistics within an organization The figure summarizes the view of logistics within an organization, where a series of related activities add value to the final product. Procurement Physical Distribution Inward transport Outward Transport Warehousing Returns Receiving Stock Control Picking Materials Handling Consolidating Communications Location Operations Suppliers Customers

30. Integrating Logistics – Cont... These activities have traditionally been managed separately, so that an organization might have a distinct purchasing department, transport department, warehouse, distribution fleet, and so on. Unfortunately, dividing up logistics in this way creates a number of problems. -Purchasing – look for most reliable suppliers -Warehousing – fast stock turnover -Inventory control – low unit costs -Transport – full vehicle loads

31. Integrating Logistics – Cont... Though worthy, these aims will soon come into conflict. In reality, these activities are closely related, and policies in one part inevitably affect operations in another. Example – RP Turner Corp. In summary, fragmented Logistics has the disadvantages of: -giving different, often conflicting, objectives within an organization. -duplicating effort and reducing productivity. -giving worse communications & information flows between the parts.

32. Integrating Logistics – Cont... -reducing co-ordination between the parts – leading to lower efficiency, higher costs & worse customer service. -increasing uncertainty & delays along the SC. -making planning more difficult. -introducing unnecessary buffers between the parts, such as stocks of WIP, additional transport & administrative procedures. -obscuring important information, such as the total cost of Logistics. -giving Logistics a low status within the organization.

33. Integrating Logistics – Cont... To avoid these problems, logistics should: • be considered not as a series of distinct activities, but as a single integrated function. • be responsible for all storage and movement of materials throughout the organization. • tackle problems from the viewpoint of the whole firm, and looks for the greatest overall benefit. In practice, it is difficult to integrate all logistics within a firm. Perhaps the major cause is the difficulty in finding someone with the knowledge, enthusiasm, ability & authority to carry through necessary changes.

34. Integrating Logistics – Cont... Hence to succeed; • A senior manager who has the necessary power should start the changes • Individuals working together & coming up with new practices and relationships, developing a culture that is based on teamwork and co-operation rather than self-interest & conflict. • Analyze the total logistics cost (TLC). TLC = transport cost + warehouse cost + holding cost + packaging cost + information processing cost + other logistics overheads.

35. Integrating Logistics – Cont... N/B: Some of these costs are inversely related e.g Lewis et al (1956) found out that airfreight is much more expensive than alternative road transport, but faster delivery eliminated the need for local stocks & warehouses, and gave considerable overall savings. • Make available integrated information & control systems. An information system might show that stocks are running low, & a control system uses this information to place an order with suppliers. To enhance this, there should be a shift from LANs & intranets to internet which is more efficient route for logistics information.

36. Stages in integration The movement of logistics from; low priority, fragmented function strategic, integrated function, is a major change, which goes through the following stages: • Separate logistics activities that are not given much attention or considered important. • Recognizing that the separate activities of logistics are important for the success of the organization. • Making improvements in the separate functions, making sure that each is as efficient as possible.

37. Stages in integration – Cont... 4.Internal integration – recognizing the benefits of internal co-operation and combining the separate functions into one. 5.Developing a logistics strategy, to set the long-term direction of logistics. 6.Benchmarking – comparing logistics’ performance with other organizations, learning from their experiences, identifying areas that need improvement & finding ways of achieving it. 7.Continuous improvement – accepting that further changes are inevitable and always searching for better ways of organizing logistics.

38. Integrating along the SC If each organization only looks at its own operations, there are unnecessary boundaries between them, disrupting the flow of materials & increasing costs. External integration removes these boundaries to improve the whole chain. Christopher (1999) supports this move, saying “most opportunities for cost reduction and/or value enhancement lie at the interface between supply chain partners”. Hence there are 3 levels of integration: separate activities within a firm; internal integration into a single function, and external integration

39. Three levels of Logistics integration The figure below shows the three levels of integration: Logistics activities Logistics with internal integration Logistics with external integration Operations Suppliers Customers Operations Suppliers Customers Operations Suppliers Customers

40. N/B: • Organizations within the same supply chain should CO-OPERATE to get final customer satisfaction. • They should not compete with each other, but with firms in other supply chains. Forrester (1961) described on interesting effect of fragmented SC. Imagine a retailer who notices that demand for a product rises by 5 units in a week. When it is time to place the next order, the retailer assumes demand is rising, and orders 10 extra units to make sure its enough. The wholesaler sees demand rise by 15 units, so it orders another 20 units. As this travels through the SC, a small change in final demand is amplified into major variation for early suppliers.

41. Benefits of integration • Genuine co-operation between all parts of the SC, with shared information & resources • Lower costs – due to balanced operations, lower stocks, less expediting, EoS, elimination of time wasting or non value adding activities, & so on. • Improved performance – due to more accurate forecasts, better planning, higher productivity of resources, rational priorities, & so on. • Improved material flow, with co-ordination giving faster & more reliable movements • Better customer service, with shorter lead times,& faster deliveries.

42. Benefits – Cont ... vi. More flexibility – faster reaction to changes vii. Standardized procedures, becoming routine & well practiced with less duplication of effort, information, planning & so on. viii. Reliable quality & fewer inspection, with integrated quality management programmes. N/B: Although the benefits of integration are clear, there are many practical difficulties in achieving them. Many organizations simply do not trust other members of the SC, & they are reluctant to share information.

43. - Cont... Even with sufficient trust, there can be problems with different priorities, competition, data exchange, appropriate systems, skills, security, & so on. How then do we achieve integration?

44. Achieving integration • Co-operation & Conflict Why should distinct firms each working for their own benefit co-operate? Why benefit another firm? – external integration brings benefits that can be shared among all members of the SC. Example – Perman Frėre There is need to overcome the traditional view of firms as adversaries. This will be achieved by recognizing that for long-term interests conflict should be replaced by agreement. This calls for a major culture change.

45. Achieving integration – Cont ... FactorConflict viewCo-operation view Profit One firm Πs at the Both share Πs expense of the other R/ship One is dominant Equal partners Trust Little Considerable Communication Ltd & formal Widespread & open Information Secretive Open & shared Control Intensive policing Delegation & empowerment Quality Blame for faults Solving shared problems Contract Rigid Flexible Focus on Own operations Customers

46. Achieving integration – Cont ... Co-operation can either be: Informal – no commitment, flexible & non-binding but either party can end it without warning. (Japanese use the concept, keiretsu, to bring together groups of firms that work together without forming partnerships), or Formal – has a written contract setting out the obligations of each party.

47. Achieving integration – Cont ... • Strategic alliance or partnering Is ‘an ongoing relationship between firms, which involves a commitment over an extended time period, and a mutual sharing of information and the risks and rewards of the relationship.’ Partnerships can lead to changes in operations. Example – Petro-Canada • Vertical integration Describes the amount of a SC that is owned by one organization. To go beyond partnerships, a firm has to own more of the SC eg take minority shareholding in a supplier.

48. Achieving integration – Cont ... If the firm owns a lot of the supply side it has backward or upstream integration; if it owns a lot of the distribution network it has downstream or forward integration. Alternatively, two firms can start a joint venture where they both put up funds to start a third company with shared ownership. N/B: In some circumstances vertical integration is the best way of getting different parts of the SC work together. Example – GZ Rexam

49. Logistics StrategyStrategic Decisions Some decisions are very important to a firm, with consequences felt over many years. Other decisions are less important, with consequences felt over days or even hours. Hence the classification: Strategic decisions – most important & set the overall direction of the whole organization; have effects over long term, involve many resources; most risky. Tactical decisions – concerned with implementing the strategies over the medium term; look at more detail, involve fewer resources & some risk. Operational decisions – most detailed & concern short term activities; involve fewer resources & little risk.

50. Strategic Decisions – Cont... Traditional view: senior managers make strategic decisions that set the organization on its course; it is still a popular approach. New styles of mgt & improved technology encourage changes; decisions are discussed, negotiated & agreed rather than simply passed down; recognition that the best person to make a decision is the person most closely involved i.e junior manager on the spot rather than remote senior manager. There are several types of strategic decision which are known by different names, but the most common are: