Elements of Logistics and Supply Chain Management

1. Elements of Logistics and Supply Chain Management

2. Definition: “Logistics is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”

4. Origin: The term "logistics" comes from the Greek "logos“ meaning speech, reason, ratio, rationality, language, phrase and more specifically from the Greek work "logistiki“ meaning accounting and financial organization. Logistics is considered to have originated in the military's need to supply themselves with arms, ammunition and rations as they moved from their base to a forward position. In ancient Greek, Roman and Byzantine empires, there were military officers with the title Logistikas who were responsible for financial and supply distribution matters.

5. In military science, all the activities of armed-force units in support of combat units, including transport, supply, communications, and medical aid. The term, first used by Henri Jomini, Alfred Thayer Mahan, and others, was adopted by the U.S. military in World War I and gained currency in other nations in World War II. Its importance grew in the 20th century with the increasing complexity of modern warfare.

6. The scope of logistics goes well beyond transportation. Logistics forms the system that ensures the delivery of the product in the entire supply pipeline. This includes transportation, packaging, storage and handling methods, and information flow. The impact of logistics in the ability of a company to satisfy its customers cannot be overstated. All other efforts at modernization within a company would not bear fruit until the logistics system is carefully designed to facilitate the smooth and efficient flow of goods in the system.

7. Competitive edge: In the fiercely competitive environment logistics provides the edge. Due to technological revolution most of the products are moving into commodity markets. In a commodity market where price is controlled by competition, where there is no product differentiation in terms of quality parameters like performance & reliability, where brands are almost irrelevant, competitive edge is that of availability of product and service in terms of time, place and quantity.

8. Effective logistics management can provide a major source of competitive advantage. The basis for success are several and are based on the links of 3 C’s, namely Company, Customer, and Competitors. The source of competitive advantage is found firstly in the ability of the organisation to differentiate itself in the eyes of the customer, from its competition and by operating at a lower cost and correspondingly at a greater profit.

9. Seeking a sustainable and defensible competitive advantage is the concern of every Company Management and it is no longer acceptable to assume that good products will sell themselves, neither to imagine that the success of today will be carried forward tomorrow. Considering the bases for success in a competitive context, commercial success derives either from a cost advantage or a value advantage or both. The productivity advantage gives a lower cost profile and the value advantage gives the product a ‘plus’ over competition.

10. 1. Productivity Advantage: In most of the industries there will be at least one competitor who will be a low cost producer, and more often than not, will have the greater sales volume. This is partly due to economies of scale which enable fixed costs to be spread over a greater volume but more particularly to the impact of the ‘experience curve’

11. The experience curve is a phenomenon which has its roots in the earlier notion of the ‘learning curve’. Researchers discovered that it was possible to identify and predict improvements in the rate of the output of workers as they became more skilled in the processes and tasks on which they were working. Bruce Henderson of Boston Consulting went a step further to extend this concept by demonstrating that all costs would decline at a given rate as volumes increased.

13. Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative costs. However logistic management can provide a multitude of ways to increase efficiency and productivity and hence contribute significantly to reduced per unit costs.

14. 2. Value Advantage. It has long been a maxim that ‘customers do not buy products, they buy benefits’. Alternatively, the product is purchased not for itself but for the promise of what it will deliver. These benefits may be intangible i.e. they relate not to specific product features but rather to such things as image or reputation. Unless the product or service offered can be distinguished in some way from its competitors there is a strong likelihood that the market place will view it as a ‘commodity’ and the sale will tend to go to the cheapest supplier. Therefore the

15. importance of seeking to add additional values to the offering will mark it out from the competition. What are the means by which such value differentiation may be gained? Essentially, the development of a strategy based upon added values will normally require a more segmented approach to the market. When a company scrutinises markets closely it frequently finds that there are distinct ‘value segments’.

16. It means different group of customers within the total market attach different importance to different benefits. Often there are substantial opportunities for creating differentiated appeals for specific segments. E.g. In cars there are different models aimed at defined segments. In between the basic small car to a very large car there are a whole variety of options, each seeking to satisfy the needs of different benefit segments. Adding value through differentiation is a powerful means of achieving a definite advantage. Equally powerful as a means of adding value is ‘Service’.

17. Markets are becoming more sensitive to service and this poses a challenge to the logistics management. This means it is becoming progressively more difficult to compete purely in the basis of brand or corporate image. Additionally, technology plays a very important role within product categories, which means that it is no longer possible to compete effectively on the basis of product differences alone.

18. Thus the need to seek differentiation through means other than technology. A number of companies have responded to this by focusing upon ‘service’ as a means of gaining a competitive edge. Service in this context refers to the process of developing relationship with customers augmented by ‘offers’ such as delivery service, after sales service, rebates, technical support etc.

19. Customer service is a key element in logistics strategy. Value added customer service is leveraged to gain competitive advantage. Good customer service builds customer loyalty amongst existing customers and through positive word of mouth communication. The following are the few cues that affect customer perception of service quality: Competence: The information provided by the firm through product brochures, manuals, websites, sales talk and the service offerings of the firms.

20. Reliability: Delivery of product or services as promised in terms of place, time and quality. Responsiveness: Returning customer calls, e-mails, letters etc, in time and resolving customer problems or complaints with speed. Transaction security: This aspect relates to the confidentiality of customer information and transaction.

21. Access: This refers to the ease with a customer will have access to information on products, and services before placing an order, status of the order placed and the status of the product complaints, claims, and damages post sale phase. Marketing is the central point of all business processes. The objective of the marketing function is to identify the need of the customers and fulfill it by providing a product or service at an appropriate price to generate profits. Hence, logistics competency plays a very important in customer service planning for developing sustainable

22. competitive advantage, not just for growth but for survival.

23. What are operating objectives of logistics management? • Rapid response • Flexibility objective of an organization: Some companies measure this as response time to customer’s order. On an average how much time do we need to fulfill one particular type of customer’s order in a year? This is a measure of Rapid response

24. Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking the goods and supplying on demand, orders are executed on shipment to shipment basis. Information Technology plays an important role here as an enabler.

25. IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs.

26. 2.Minimum variance Delivery objective of an organization, this can be measured as ‘On Time Delivery’ or OTD. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? This percentage is OTD. Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit.

27. Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is expected to minimize these events, thereby minimize and improve on, On Time Delivery.

28. 3. Minimum inventory This is component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio. Americans call this measure as turn velocity. Logistics management reduces these turns without sacrificing customer satisfaction. Lower turns ensure effective utilization of assets devoted to stock.

29. [Concept of single piece flow as practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the overall wellbeing of a company in view and fix a minimum inventory level without trying to minimize the inventory level as an isolated objective.

30. 4. Movement consolidation Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc. for transporting small shipments just in time [reduction in inventory costs] expensive transport modes are used which again tend to hike the costs. Movement consolidation is planning several such small shipments together [of different types of shipments] by integrating interests of several players in the supply chain.

31. Generally, large shipment size and long distances reduce transportation cost per unit. Movement consolidation shall result into reduction in transportation costs.

32. 5.Quality If the quality of product fails logistics will have to ship the product out of customers premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the managements world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually.

33. 6.Life cycle support [cradle to cradle logistical support- produce, pack (cradle) and repack(cradle)] • Logistics function is expected to provide life cycle support to the product after sale. This includes • a. After sales service: the service support needed by the product once it is sold during its life cycle • b. Reverse logistics or Product recall as a result of • rigid quality standards [critical in case of contaminated products which can cause environmental hazard]

34. transit damage [leaking containers containing hazardous material] • product expiration dating • rigid laws prohibiting unscientific disposal of items associated with product [packaging] • Rigid laws making recycling mandatory • Erroneous order processing by supplier

35. Logistical Performance Cycles Logistical performance cycles link the facilities in a value chain with each other.The facilities in the value chain are called nodes and the links connecting these nodes are logistical performance cycles. These links are product transportation and information flows. Obviously information flow is vigorous in both directions where as product flows down the value chain although in some cases upward flow is possible. Close examination of

36. these links reveals dynamics, interfaces and decisions within the logistical system. Logistical performance cycles are input sensitive and highly dynamic. They render entire system dynamic and responsive to customer needs. If the LPCs are not dynamic obviously the organization loses the edge. Logistical Performance Cycle Diagram next slide.

37. TMATERIAL ERIAL PPROCUREMENT CYCLE CUREMENT CYCLE COMPONENTS PLANT PLANT G MANUFACTURING SUPPORT CYCLE E MBASSEMBLY LY DIS DISTRIBUTION CENTER UTION CENTER PH PHYSICAL DISTRIBUTION AL DISTRBUTION CUSTOMER MER SYSTEM INPUT T SSYSTEM OUT PUT

38. Physical Distribution Cycle Order Placement & Expediting Order Processing Order Transmission Customer Order Sourcing Supplier Order Selection Product Transport Delivery To Receiving Transportation PROCUREMENT CYCLE PHYSICAL DISTRBUTIONCYCLE

39. Inventory is made to flow from one warehouse to another, factory to ware house, plant to plant orwarehouse to customer. Sluggish LPCs reveal poor interface between the nodes and betweencustomer and organization.LPCs reveal effectiveness and efficiency of resource allocation and operational decisions in the organization. To understand the operating system one has to analyze these links. A logistical operating systemrequires links, nodes and inventory to perform logistical operations. Nodes are the facilities

40. linked by logistical performance cycles. Inventory is measured, stored and moved in nodes regularly. But this may also be done during transportation. We can notice that three types of logistical performance cycles exist in a logistical operating system. The cycle linking material source and components plant is procurement cycle.

41. Procurement cycle Components plant is a node which manufactures components or detailed parts needed to make sub assemblies for the final assembly. This is where the operations function begins to operate. Raw materials are to be made available here for production. Procurement cycles connect raw material source and component plant or plants.

42. Manufacturing support cycle. The cycle linking components making plant, assembly and distribution center is manufacturing support cycle. The logistical network for an organization may contain several components plants and or severalassembly plants. These plants are to be linked to enable flow of inventory as and when needed.Finished goods should flow from assembly plant or plants to the distribution centers. Thissupport to manufacturing is provided by manufacturing support cycle.

43. Physical distribution cycle. The cycle linking distribution center to customers is called physical distribution cycle.Logistical performance cycles are input sensitive and dynamic in nature. We can visualize thesecycles vibrating with vigor whenever a customer order is received for fulfillment.Overall efficiency of logistical operating system depends on the efficiency of logistical performance cycles. Logistical performance cycles link participating firms and organizations inthe supply chain.

44. Managing operational uncertainty Variance in logistical performance cycle results in customer dissatisfaction. If an overall customer delivery cycle is analyzed, we naturally find that it is made up of several mini cycles performed in logical sequence. These cycles are, order selection cycle, order processing, order transmission, customer delivery cycle and order transportation cycle.

45. We have to analyze these cycles to find out difference between average performance time and maximum cycle time. This gap is to be analyzed to eliminate variance. When this variance is reduced goods begin to arrive at destinations earlier than expected.Infrastructure is required to be strengthened to cope with improved performance.

46. Value Chain

47. Inbound Logistics: ‘Inbound’ activities to receive, store and distribute inputs to the product, such as material handling, inventory control, warehousing and contact with suppliers. Inbound logistics traffic departments do not simply manage shipments from their own companies (outbound), they plan shipments from other companies "in" to their location.

48. OUTBOUND LOGISTICS Involve The Collecting, Storing, And Distributing the product to the buyers. (e.g. Processing of orders, warehousing or storage of finished goods, and delivery)

49. Customer Order Cycle A customer order cycle begins with the placement of an order by a customer. It ends when you are finally paid for goods or services rendered. But there are activities in between the two events that consume time. Some add value, such as packing and shipping, and some are non-value adding and delay time, such as moving the order around the building from mailbox to mailbox, sitting on a desk, or repetitive motions.

50. When a cycle ends, a lot of non-value adding time has been consumed that may constitute 90-95 percent of total time. Some of the time is lost in travel, some is lost in the processing backlog, and some may be lost diverting a customer's order to a credit department for release. If you can identify the non-value added time in the cycle, you can devise ways to eliminate the causes.