Logistics management

Recap of the four dimension reader chart

We saw four dimension reader chart. Dimensions include product, activities, objectives, and system. The trends we discovered are:

• Pass from the optimization of single activities to the integrating function.
• From physical distribution management to supply chain management (internal and external logistics).
• From execution to planning to design.
• From cost reduction (cost optimization) to customer service and profit optimization.
• From direct flows of product to flow of information services, money… to reverse logistics.

Trend n 1, 2 describe the evolution of the system. Trend n 3 regards the activities. Trend n 4 has to do with the objective function. Trend n 5 has to do with the product dimension: from management of only the direct flow, to also the reverse logistics.

Detailed analysis of each trend

1. From the optimization of single activities to an integrated function

Definition of 1976: the word of integration is at the very beginning of the definition. The least expensive solution to transport goods from China to Italy is the ship, not the airplane. Look at the example 1.1. We should consider both the inventory costs and the transportation costs.

Integrated: systemic approach → total-cost analysis. Transportation + warehousing + inventory management = physical distribution system. Production + distribution = outbound supply chain. You connect your supply chain from the end of the production to the market. You include also production cost.

Supply + production = inbound supply chain. You apply the concept of integration from the starting point of the supply chain to the production. Supply + production + distribution = Internal supply chain of the company. This system is the broader system that I can have within my company. Suppliers + internal supply chain + customers = extended supply chain. This is the broadest way in which you can apply the logistics. It is the real supply chain.

2. From physical distribution system to internal supply chain management

Supply chain management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology.

The supply chain management is the integration of business processes along the supply chain. In the professor's opinion, the SCM is the integration (integrate management) of business processes along the extended supply chain. The business processes are logistics, marketing, new product development and so on. I am taking a supply chain perspective, broader than the company. It comprehends also the suppliers for example. Supply Chain Management includes all the inter-company processes, i.e. the processes which extend outside the company boundaries and span over the whole supply chain (logistics, new product development, marketing, etc.). I am taking a strategic approach.

Strategic approach

• Competitiveness of the company is strongly impacted by the actions of the other supply chain members.
• Competitiveness is, first of all, between different supply chains (and not between companies of the same supply chain).

Strategic implications

• Competitiveness of the company can be improved focusing on the interface processes with the other supply chain members, through integration and collaboration.
• In many cases, the action on the interface processes is more effective (in terms of impact on KPIs) than that on internal processes. Sometimes to reduce costs, I should work on the supply chain optimization and not only in the internal issues of the company.

Look at the example 1.2. Typically, a retail of food industries has 20 days of inventories in terms of time, while the manufacturer has 40 days of inventories. Total = 60 days on inventories, not very good performance. One indicator we should consider is the on-shelf availability in the supermarket from a customer perspective. What level of availability do they see? 93%, for example. Not very high because the days of inventories are pretty high.

This situation is bad for both the manufacturer and for the customers. How can I improve? I can work on the internal SC (on the M and on the R) or I can work on the extended supply chain so in the integration and in the collaboration. Why are there too many days of inventories? Because there are safety stock both in the perspective of retailer and manufacturer because there is a problem of unreliability of the frequency of the order of the customers. This perception can be reduced if the M and R work together to have a clear overall visibility. They can synchronize the transportations. The change of information is very important to optimize the inventories. By this way, they can increase of course the on-shelf availability. It is very difficult to do because it requires integration and collaboration with the other players. I have to look at the overall key performance indicators. You have to share the benefits along the supply chain if you look at the extended SC.

3. From execution to planning to design

At the execution layer, we find some activities of transportation, handling (movement of goods inside the warehouse), warehousing (which includes the handling and the storage → the management of warehouses), production, packaging, management of information, and documents.

• It is the most traditional "scope" of Logistics (but it is only part of its most comprehensive scope).
• It is the base upon which all the other stacks are built (therefore it represents the "basics" a good logistician must know).

Second layer

Logistics planning is the process that plans for the adjustment of the operational capacity and for the execution of the operational activities linking the demand and the supply sides of the supply chain. It aims at "getting the supply chain aligned and tuned".

The demand management is the first thing to do. Then there is the inventory management (management of distribution activities, how to synchronize). Then production planning and procurement planning. These are the main components.

• This is the stack that "plans and manages" the operational level of logistics.
• It should be an integrated process (and not merely a collection of phases).
• It should consider both the structure of the distribution network and all the specific operational constraints.

Third layer

Logistic System design and strategy aims at defining:

• The logistics network structure (supply network, production network, and distribution network). The supply chain structure, the nodes, and the arcs. What are the plants, the warehouse, the supplier’s locations.
• The transportation modes (road, rail, ship, inter-modal, etc.).
• The "make or buy" policies: for which part of the network you buy from third parts.
• The target KPIs we want to achieve service level, logistic costs (how much you can afford to spend on logistics).
• The information systems.

These decisions must be strongly aligned with the overall company strategy (corporate strategy) (markets served, product range, trade channels, etc.). These choices have to consider the specific features/constraints of both the planning process and the logistics execution process.

4. From cost reduction to customer service to profit optimization

Costs are logistic costs. What is included in them?

• Transportation costs.
• Handling costs (of moving the goods within the notes).
• Storage costs (of keeping the goods within the notes). (These last two form the warehousing costs).
• Packaging costs.
• Info/document management (administrative costs).

The average incidence of logistics costs on revenues is between 5% and 15% in 90% instances. Logistics costs/revenues ratio depends on the industry, on the type and the role of the company and of the player on the network, on the supply chain perspective we are taking (internal or extended SC). If I consider the pharma manufacturer, the incidence of logistics costs is near the 5%. The opposite for the manufacturer of grocery low-value products because you are considering very low-value density products. You can have many examples in between (fashion industry b/w 5 and 10%). In the e-commerce supply chain of food, we are on 20-25%. Very high because logistics is very complex in this case.

The incidence of logistics costs changed over time. In the last decades, the transportation costs and the inventory costs are increased because there is an increase of supply chain risks related to the structure and the management of a GLOBAL supply chain. If I look at the supply chain perspective, usually the logistic costs increase.

Service level

Service level depends on many factors:

• Time-related: Order cycle time (order-to-deliver): time to move the goods to the final location. Being fast. Punctuality (on-time delivery): being reliable in terms of time.
• Availability: On shelf-availability.
• Quality: Of product, Of packaging. You can add some other elements.

Logistic management objective function = logistic costs and service level. You cannot work only in one of these two factors. These two concepts are related. We call this relation the cost-to-serve relation.

5. From direct flows of goods to direct/indirect (reverse) flows

Information: there are three main categories of flow:

• Transactional data: all data needed to finalize a transaction. Information about the orders, the invoices, the transportation documents, order confirmation. These are the order cycles, the order-to-payment cycle.
• Planning data: demand forecast, inventory status, production plans, operational capacity.
• Product and marketing data: information about the product range, the stock keeping units (SKUs), all the characteristics we have to know about the product, product phase-in (look at the availability), and product phase-out (look at the inventories), promotions.

Logistic of service industries

Logistics is key also in-service industries. For example, within a healthcare industry: drugs, supplies (whatever is needed in a hospital), food, medical equipment, documents, people (patients and doctors and nurses). After-sale service, Hospitality/tourism, Food service, Humanitarian aid, and other different service industries.

Reverse logistics

• Unsold products/ returns management in e-commerce.
• End of life products.
• Packaging.

What is the difference between direct (forward) logistics and reverse logistics? In many industries, the direct logistics is usually divergent, so you start from some/few sourcing points and the flow is divergent, so I reach thousands or more of delivery points. Here you manage items which are identified using barcodes or radio frequency identification (RFID). There could be some place for the transformation of goods, you might have it.

The reverse logistics is convergent. You have to do with non (loosely)-identified items. It requires time in order to identify them. Transformation mandatory. The reverse logistic is more complex. The items are non-identified or difficult-to-be-identified at the beginning of the process. They can be identified but the effort is high. Think about a pallet of mixed unsold or damaged food products coming from a supermarket and entering a food bank. You can identify the items but it takes a lot of time.

Example: logistics of goods. You have farmers, manufacturers, retailers/HORECA/cantinas, and then final consumers. This is usually the direct logistics of food. This type of flow is divergent after the manufacturers, so the main part is divergent. If we have unsold edible food (we can fulfill the poor people’s hunger). So, we move these products from the farmers, the manufacturers, and the retailer/... to food banks. This is a very complex process: we have to distinguish b/w edible and not edible, to collect and then redistribute food to hungry people. It is more expensive and more complex.

Logistic management and strategy

Main points: what is the strategic impact of logistics? Is logistic relevant to corporate strategy? If yes, how? How can logistics affect corporate profitability? What are the main logistics strategies?

We will proceed this way:

1. Frameworks and models: ROA model and Supply chain strategies model

2. Seminars: real case examples: Barilla and ABinBEV

ROA Model

ROA is return on assets, indicators of profitability. The ROA has at the numerator the profit (revenues-costs) and at the denominator the assets used (fixed capital+ working capital). There are so at least four ways to impact on the ROA.

• Impact of logistics on costs.
• Impact of logistics and service level on revenues.
• The connection b/w these two: service-cost trade-off.
• Impact on working capital.
• Impact on fixed capital and logistics-related assets.
• Managing the ROA trade-off: what is the best logistic policy? So, 6 ways to impact the ROA.

1. Logistic costs

How can a company reduce logistics costs? We have transportations, handling, storage, administrative costs (included in the previous aspects), packaging, inventory-related costs (composed by storage already mentioned, cost of capital, cost of obsolescence). Look at notion 3.1. How can I reduce costs?

• By improving productivity at individual activities level, I improve the efficiency.
• By integrating activities (total costs analysis, or systemic analysis).
• By improving quality: I avoid a lot of costs due to low-quality materials or products in the original process.

2. Service level

Logistic-related service level: time-related, availability-related, and quality-related.

• Availability related: another way to call it is "fill rate". The fill rate is the ratio between the demand you can fulfill with inventories at hand and the demand you received (+ potential). Indicators that measure the capability of the supplier to satisfy the requests of the customers through the inventory on hand in the warehouse. We can measure it at different levels:
• Order level: Order Fill Rate. Percentage of customer orders satisfied from stock on hand. It depends on the Fill Rate measured on both the order lines (Lines Fill Rate) and the single pieces (Item Fill Rate).
• Item/SKU level: Item Fill Rate. It’s the Fill Rate measured at the single Item/SKU Level.

The connection between OFR and IFR: if I have one order consisting of 10 order lines (with 1 order line = 1 product/SKU) and IFR is 99%, the OFR is IFR elevated to the number of order lines. In this case, OFR=0.99¹⁰ = 90% circa. IFR is demand fulfilled looking at the single product level and can be measured in terms of order lines, number of pieces, whatever you like.

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• Stockout. It is the opposite of the Fill Rate.
• Order Completeness. The delivery is complete when the goods requested (i.e. all the order lines and all the pieces per line) are delivered outright. It depends on both the Item Fill Rate and the delay the customer is willing to accept in case of partial stockout.

Time-related

The time-related indicators are:

• Order Cycle Time. It is the time elapsed between the order issuing and the order delivery. It depends on both the time required to carry out the activities and the Order Fill Rate (OFR). It is a matter of speed.
• Punctuality/On Time. It is the ability of the supplier to deliver in compliance with the time window (ΔT) arranged with the customer. In case there is no specific agreement on the time window, punctuality is the ability to be compliant with the promised Order Cycle Time. It is a matter of reliability.

Quality-related (accuracy-related)

• Order compliance. It is the ability of the supplier to deliver goods that are compliant with the order specifications, in terms of both items and quantities. it can be measured on different levels (orders, order lines, units).
• Document compliance. It is the ability of the supplier to create and send documents consistent with customer specifications and with the goods delivered.
• Packaging compliance. It is the ability of the supplier to use packaging compliant with customer expectations (i.e., consistent with the customer storage system, adequate protection of the goods, …).

Compound indicators

• DIFOT (Delivered In-Full, On-Time) or OTIF (On-Time In-Full). It is a combination of Completeness, Punctuality, and Accuracy. It measures if the Supply Chain is able to deliver the expected product (reference and quality) in the quantity ordered by the customer at the place agreed by the customer at the time expected by the customer (in most of the cases, with a tolerance defined with the customer).

NB: It has the advantage to measure the performance of the whole logistic organization to meet the customer service expectations. To reach a good OTIF level, all the functions of the supply chain (e.g., orders taking, procurement, suppliers, warehouses, transport...) have to work at their best level. The main contribution of OTIF is to allow seeing at a glance how the company delivers its customers.

A higher service level how can impact on revenues, profits? I can set a premium price for a better service or an increase on the customer base. It is not clear how to use the customer level to impact on revenues. I must think about that.

3. Trade-off between service level and costs

How can a company create value working on the trade-off between service level and logistics costs? Remember that the service level depends on what customers want. So, I have to look at the cluster of customers that collect customers on the basis of their preferences. This analysis should be done on different customers' clusters.