Logistics Management Appunti/Notes

Logistics management

Set of knowledge

Can be described through the T model. It’s more important to know the principles of logistics management (LM). In reference to some specific topics, we will go more in-depth.

Ability to learn

There are 3 main elements interconnected:

• Curiosity (openness to learn), if you are not open to learn you do not learn. It is a personal attitude.
• Modelling skills (problem setting and solving), the ability to set a problem, the main variables of the problem, the main interrelations of the main variables and to use the proper methods to solve the problem.
• Critical thinking (judgement oriented, informed by guidance, it’s rational/logical, systematical it takes into consideration all the elements that are present in a problem).

Teacher-students agreement

• Right attitude (Dedicated, Curious, Interactive, Respectful, Transparent)

Definition of logistics management

(Council of Supply Chain Management Professionals)

That part of supply chain management (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 the point of consumption in order to meet customers’ requirements.

Logistics management is:

• A process: set of activities (interrelated) aimed at meeting customers’ requirements
• Supply chain process (internal scm, external scm which connect the suppliers, the company, the customers of the company, even the suppliers of the suppliers)
• Execution and implementation in terms of storage of goods and flow management + planning & control (production planning, procurement planning) + design of the process

Main objectives of logistics

• Efficiency -> cost reduction, productivity increase (output/input) doing more output with less input
• Effectiveness -> meeting customers’ expectations, but first you have to understand what are the customer expectations (service level)

We will use a radar chart in order to understand the evolution. A radar chart consists of 4 main dimensions. Logistics is the movement of finished products, in some cases also movement of raw materials.

“From the end of production line to consumer”: distribution

In terms of performance: efficiency. The initial scope of logistics was very rare, looking about a small system, the distribution part. What we call the internal supply chain.

More comprehensive slide, we are talking about planning and controlling, there is a difference in terms of products, now we talk about raw materials, in-process inventory, and finished goods. From point of origin to point of consumption.

Product dimensions

• Product: all the goods (raw materials and work-in-progress)
• Activity: planning
• System: internal supply chain (procurement, production and distribution)
• Performance: efficiency

So now we have a wider scope of logistics. We are not talking only about goods but also about related information. Logistics is also about effectiveness and customer requirements.

Product: goods + information element

Activity: planning

System: internal supply chain

Performance: effectiveness

1992: goods, information, and services. New element here are services. Logistics does not apply only to product industries, but it is also used in services. Logistics does not apply only to product industries, logistics are also important with logistics that have to do with services (hospitality, tourism, after-sales services).

Final definition that we can use nowadays: We are talking about supply chain, not only forward information and flow but also reverse flow.

Product dimension: raw materials, finished goods, and services

System dimension: we include now the external supply chain, logistics is also about the optimization of external supply chain.

Activity: execution, planning but we talk about also reverse logistics of goods, finished goods (from the market to the beginning of the chain).

The definition of nowadays is a lot broader, larger than the initial definition of logistics.

Recap

We tried to understand what logistics is at the surface, we saw the scope of logistics through dimensions of the radar chart (Product, Activities, Objectives, and System).

Trends

• Logistics starts from the optimization of single activities to an integrated function (System)
• From Physical Distribution management to supply chain management (System)
• From Execution to Planning to Design (Activities)
• From Cost Reduction to Customer Service and Profit optimization (Objective)
• From direct flows of products to the management of flow of information, services, money … to Reverse Logistics (Product)

Logistic starts from the optimization of single activities to an integrated function (System)

At the very beginning this is the definition in 1976. What’s the meaning of integrated management of logistics activities?

What is the least expensive solution to transport goods from China to Italy?

• By ship
• By airplane

What’s the value density of the goods? What’s the value of the good compared to its volume? We assume 310€/dm³.

What’s the Annual Flow? 1500 pallet goods = 1500 m³/y= 50 containers (1 container=30 m³).

By ship:

• Lead Time = LT = 6 weeks
• Period (ordering) = T = 3 months (period between one order and another, it is different from order frequency)
• Cost = 1500€/container

By airplane:

• Lead Time = LT = 1 week
• Period (ordering) = T = you place an order every 2 weeks
• Cost = 15000€/container

What is the Objective Function? -> Least Expensive Solution

Assumption only on COSTS

Transportation costs + Inventory costs = Overall costs

Transportation Costs = Annual Flow x Unitary Transportation Cost

By ship: 50 c/Y x 1500€/container = 75000€/Y

By airplane: 50 c/Y x 15000€/container = 750000€/Y

Inventory Costs = Average Inventory Level (AIL) [containers] x Unitary Inventory Cost (UIC) [€/container * year]

Unitary Inventory Cost = Value of 1 container [€/container] x % inventory costs [%/Y] = 90000€/container * Y

10000 €/m³ x 30 m³/container= 300000€/container

%inventory cost = 30%/Y additional assumption

Average Inventory Level (AIL) [c]-> how many containers do we have? = AIL in terms of time [Y] x Average Flow[c/Y]

What’s the delay in this flow in terms of time?

In-transit inventories depend on the length of the transportation arch. The longer the transportation arch the higher the in-transit inventories. (=LT)

Warehouse inventories is half of a period between an order and another. (=T/2)

Inventory Costs

By ship= 3/12 years x 90000€/Y*c x 50 c/Y = 1125000€/Y

By airplane = 0.5/12 years x 90000€/Y*c x 50c/Y=189000 €/Y

You have two different perspectives if you are the Transportation management or the Inventory Management, but you need to be the Logistics Management.

If you optimize single activities, you do not reach an overall optimal solution. Of course, if you change some of the assumptions maybe the results change.

Products with a lower value density the results could be that the least expensive transportation cost is the ship. The answer is not always the same.

The initial issue was to better understand the meaning of “From the optimization of single activities to an integrated function” -> it’s a systemic approach, the so-called total-cost analysis.

Transportation + Warehousing + Inventory Management = Physical Distribution System

Production + Distribution = Outbound Supply Chain

Supply + Production = Inbound Supply Chain

Supply + Production + Distribution = Integration of the internal supply chain

Now you are including all the activities within the supply chain of the company.

Suppliers + Internal Supply Chain + Customers = Extended Supply Chain

From Physical Distribution management to Internal supply chain management to Extended Supply Chain Management

SCM = the integration (integrated management) of business processes along the extended supply chain. So, it’s a new way of looking at business processes (marketing, logistics, new product development) along the extended supply chain (taking a supply chain perspective).

Supply chain-based competition: You are taking a strategic approach, in which you recognize the competitiveness depends on the actions of the other supply chain members. Competitiveness is between different supply chains; you should include all the players in the chain.

Strategic implications: The competitiveness can be improved focusing on the interface processes with the other supply chain members. In many cases, the integration of the processes is even more effective.

Let’s assume we are in the Food Industry, the two companies want to optimize the inventories level. Usually, a Retailer has warehouses, of course there are stocks in the point of sales. The Manufacturer typically has warehouses after the production.

How many inventories on average a big retailer has in terms of time?

Retailer has 20 days of inventories and the Manufacturer has more or less 40 days of inventories.

Let’s consider now the On-shelf Availability in a typical point of sales. 93%

The customers what level of availability see in the network? 7 times out of 100 if the customer is searching for a specific product don’t find that.

Let’s consider how to improve the situation (60 days of inventories of the system and 93% of on-shelf availability), how we can improve this KPI?

There are 2 solutions:

• Work on Internal Supply Chain (Manufacturer and Retailers)
• Extended Supply Chain (integration and collaboration along the same processes)

The 20 days of the retailer are the Safety Stocks, a big portion of the 40 days is Safety Stock because he has a perspective of unreliability in terms of how much and how frequently the retailer makes its orders. It’s a perception of untrustability. The better way is to do together, improve.

In order to reduce the 20 days of inventories and to improve the retailer can work with the manufacture to reduce the amount of safety stock and to improve the On-shelf Availability. You can better optimize your portion by improving all the variables that are also in control of other players.

From Execution to Planning to Design

The 3 stacks of Logistics Management. Let’s open the EXECUTION layer. Logistics Execution includes the design and management of the processes that support the flow of materials and data. Of course, you find some activities that allow movement of goods within the system.

• Transportation
• Warehousing includes handling, but includes also storage
• Production and transformation activities
• Packaging, many of logistics cost is the optimization of packaging
• Information/Document Management

All these activities are movements and management of documents.

The PLANNING 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. We are talking about some interrelated processes like:

• Demand Management
• Inventory Management and Distribution Management (how you synchronize transportation with inventory management network)
• Production Planning
• Procurement Planning

You should be able to manage and be able to connect the level with the execution level. It should be an integrated process.

Let’s try to focus on the DESIGN layer. Network/Supply Chain/Structure, what is the network of the supply chain configuration. What are the main nodes and arcs (what is the structure of the network?)

• Network of plants, warehouses, suppliers
• Make or Buy decision is a very important component, for which part of the network you buy services from other players, how vertically integrated is your supply chain.
• Target KPIs, what’s the target service level, what’s the delivery time you want to achieve, what's the target of logistics cost, how much you can afford to spend on logistics.
• Decisions about the information systems, how much you want to invest in the info system

So, logistics system design and strategy aims at defining:

• The logistics network structure
• The transportation modes
• The make or buy policies

These decisions must be strongly aligned with the overall company strategy. The design level needs to be connected to the Corporate Strategy.

From Cost Reduction to Customer Service to Profit Optimization

In order to better understand this concept, we need to understand 3 concepts. Which is the average incidence of logistics cost on revenue? But first of all, what is included in Logistics Costs?

• Transportation Costs
• Handling Costs (movement within the warehouses or plants)
• Storage Costs (keep the goods there)
• Packaging (not only the final, but all the intermediate packaging)
• Info/Document Management/ Administrative Costs

So, what’s the ratio between Logistics Costs and Revenues, it depends a lot on which industry are you considering, on the type and the role of the company in the network, it also depends on the supply chain perspective. 5-15% (90% of instances) eCommerce Supply Chain of Food products, logistics cost impacts more like 20%/25%.

Value Density is not a driver of all logistics costs, is a driver of inventory costs but not of transportation costs. It is not the most important driver of transportation costs, the driver of transportation costs is the density of the good.

The incidence of Logistics Costs changes overtime, the average logistics costs among different industries are changing. (There is a U curve). We got the reduction on logistics costs but at the beginning of 2000 there’s an increasing of transportation costs, could be an increasing in inventory costs because of what we can call supply chain risks. It’s obvious that in global society there is a risk of supply chain, usually, you increase inventory or capacity.

You are looking at the sum of logistics cost, but you consider the cost of logistics along the supply chain.

Service Level

• Time-related -> order cycle time, which is the time from order to deliver, punctuality, on-time delivery
• Availability -> on-shelf availability
• Quality -> quality of the products, delivering the right products, quality of the packaging

The most important thing is that when you look at logistics management objective function you have to consider logistics costs & service level. You do not have to forget Service Level. These two concepts are related. If I increase the Service Level, I can see an impact on Logistic Costs. Remember Logistics costs includes: Transportation costs, Warehousing costs (Handling + Storage), Packaging, and Administrative. Connection between Logistics costs and Service. We call this Cost-to-serve-Relation.

From direct flows of goods to direct/indirect (reverse) flows of information, services, money + reverse logistics of goods

Let’s start with information. What we mean with the flow of information? There are 3 main categories of flows:

• Transactional data: all the data used to make transactions (orders, invoices, transportation documents, order confirmation). Order to payment; order cycle
• Planning data: data that has to do with the planning process, what are the main planning data? (demand, forecasts, inventory status, production plans, capacity (operational capacity that some players have in a specific period in order to issue a demand that can be fulfilled))
• Product and marketing data: product range/SKU (Stock Keeping Unit), information and features of the products in order to manage those products within the logistic system, product phase-in/phase-out (manage with attention the stocks of those products, where you have to be careful about the availability of the phase-in products), promotions (artificial trigger which can change the pattern of demand).

What we mean with the term logistics of service industries?

• Healthcare -> what are the main products needed?
• Drugs
• Supplies
• Food
• Medical equipment
• Documents
• People (patients, doctors & nurses)
• After-sales service
• Hospitality/tourism
• Food service
• Humanitarian aid

Logistics is also key in the services industries. Let’s understand better the meaning of reverse logistics.

• Unsold products (typical for many sectors like book sector, issue of returns management in e-commerce)
• End of life products
• Packaging

What’s the difference between Direct/Forward Logistics and Reverse Logistics?

Direct/Forward Logistics

• Divergent: you start from suppliers and the flow from that point and forward is divergent
• Identified items: at the end of production line items are identified (through bar codes, RFID) which makes logistics easier
• Might have transformation

Reverse Logistics

• Convergent: you have to collect them and move them to some points of transformation
• Non-identified items (loosely), it requires time in order to identify them. 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.
• Always you have a transformation activity, you have to work the products in order to make the product usable again

Reverse Logistics is more complex than Direct Logistics.