Module 2 ROLE OF LOGISTICS IN SUPPLY CHAINS

Learning Objective To To To To view the evolutions of logistics and supply chain understand logistics service provider briefly explore value-added contribution of logistics in the economy understand the main activities in logistics industry

Introduction The emergence of the extended manufacturing enterprise, a globally dispersed collection of strategically aligned organization, has brought new attention to how organizations coordinate the flow of information and materials across their supply chain.1 Recent trend in global production have both increased supply chain complexity and reinforce the notion that logistics strategies and practices are essentials elements of business strategy.2 Traditional logistics practices and technologies that integrate productive activities within the factory are necessary but not sufficient for competitive success. New logistics practices and technologies must now also link production and logistics processes in different organizations across geographically dispersed locations.3 In this chapter, briefly we will analyze the links between logistics practices and improved performance that recognizes the role of logistics and its importance to supply chain.

Emergence of Logistics Logistics activity is literally thousands of years old, dating back to the earliest form of organized trade. It first began to gain attention in the early 1900s in the distributions of farm products, as a way to support the organizations business strategy, and as a way of providing time and place utility.4 The increasing complexity of supplying ones business with materials and shipping out products in an increasingly globalized supply chain has made the logistics evolved as a vital business concept. This can be rhetoric as having the right item in the right quantity at the right time at the right place for the right price and is the science of process and incorporates all industry sectors.

Gregory N. Stock, Noel P. Greis, John D. Kasarda, Enterprise Logistics and Supply Chain Structure: The Role of Fit. Journal of Operations Management 18 (2000) 531-547, pp. 1. ftp://mail.im.tku.edu.tw/Prof_Shyur/Enterprise%20Information%20System/11080614323905135.pdf. 2 Ibid, pp. 1 3 Ibid, pp. 2 4 Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1.

Message Focus

Logistics business concept: Having the right item in the right quantity at the right time at the right place for the right price (five rights).

Development in Supply Chain Management In Three major movements can be observed in the evolution of supply chain studies are creation, integration, and globalization.5 1. Creation Era The term supply chain management was first coined by an American industry consultant in the early 1980s. However the concept of supply chain in management, was of great importance long before in the early 20th century, especially by the creation of the assembly line. The characteristics of this era of supply chain management include the need for large scale changes, reengineering, downsizing driven by cost reduction program, and wide spread attention to the Japanese practice of management between 1945 and 1990.From the beginning, the goal of SC was cost reduction and at the sametime increasing the value added throughout the organizational processes. However, in recent years the primary goal of SC has shifted towards customerfulfillment. 2. Integration Era This era of supply chain management studies was highlighted with the development of Electronic Data Interchange (EDI) system in the 1960s and developed through the 1990s by the introduction of Enterprise Resource Planning (ERP) systems. This era has continued to develop into the 21st century with the expansion of internet-based collaborative systems. This era of supply chain evolutions is characterized by both increasing value-added and cost reduction through integration.While EDI systems were mainlyconcerned with inter-organizational integration, and ERP systems were mainly concerned withintra-organizational integration; internet-based solutions became concerned with both inter-organizationalintegration and intra-organizational integration. An integrated SC provides asignificant competitive advantage for the individual participant organizations, consequently in developed economies the enterprise-enterprisecompetitions have been taken over by the chain-chain competitions.
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BaharMovehedi, KavyanLavassani, Vinod Kumar, Implementation of B2B Ems for Supply Chain Integration: A Transitional Model, http://ebiz.uoregon.edu/poms2008/FullPapers/008-0054.pdf

3. Globalization Era The third movement of supply chain management development, globalization era, can be characterized by the attentions towards global systems of supplier relations and the expansion of supply chain over national boundaries and into other continents. Although the use of global resources in the supply chain of organizations can be traced back to several decades ago (e.g. the oil industry), it will not until the late 1980s that a considerable number of organizations started to integrate global sources into their core business. This era is characterized by the globalization of supply chain management in organizations with the goal of increasing competitive advantage, creating more value-added, and reducing cost through global sourcing.Global sourcingis defined as The decision-making process through which firms find and manage inputs forproduction in an integrated, international context in order to contribute to the creation ofsustainable competitive advantage by the firm. What differentiates thisera from the creation-era is the attention toward global strategic perspective by the operationalmanagement.

What is Logistics? So what exactly is logistics anyway? And what does someone in logistics actually do? The term logistics has its origin in the military. From that perspective, it applies to the process of supplying a theater of war with troops, equipment, and supplies. The logistics industries borrowed this term and have applied it to the discipline known as business logistics.6 Logistics plays a major role in one country. As a piece of the corporate landscape, logistics cover a broad array of functional areas. At the bare minimum, the scope of logistics entails traffic/ transportation, shipping and receiving, warehousing, import/ export operations. Many times, the additional areas of inventory management, purchasing, production planning and customer service can fall under the umbrella of logistics as well.7

6 7

Michael B. Stroh, What is Logistics? Pp.1 Ibid, pp.1

Message Focus

Military logistics: The ability to effectively and efficiently distribute and store supplies and personnel were key factors in the success of the U.S. Armed Forces in the Persian Gulf War in 1990 1991.

Logistics Service Provider in Supply Chain Management Logistics and supply chain management are seen as the fields in which logistics providers, by virtue of their particular expertise, are able to offer the most added values to transactions in the freight trade. Freight forwarders, as logistics service facilitators, play an important role in supply chain management, as an increasing number of firms outsource their logistics function. These third party logistics providers are now becoming more involved in the design, management, and control of firms supply chains. In order to help their customers, logistics providers need to behave more like partners of their clients. Not only do logistics providers have to arrange for the transport of cargo and facilitate its clearance through customs, they also need to manage their clients order processing. This means that logistics providers are involved not only in lowering their clients cost by reducing waste in ordering operations, but also in integrating their clients supply chains. The aims are to make the partnerships so tight and seamless that the logistical services provided become part of the clients own businesses.8

Ruth Banomyong, Supply Chain Dynamics in Asia: Role of Logistics Providers in Handling Supply Chain, Asian Development Bank Institute Working Paper Series, No. 184, January 2010. pp. 7. http://www.adbi.org/files/2010.01.07.Wp184.supply.chain.dynamics.asia.pdf

Logistics Service Provider

Supplier

Manufacturer/ Exporter

Custom Port of origin

Customs Port of destination

Distributor / Importer

Retailer

Information flow Physical flow Control system

Figure 2-1: Role played by logistics service provider in global supply chain9

The task of a logistics is to facilitate trade to the extent that the trader needs only to produce and sell the goods (or to order the goods, in the case of imports). Once this has been done the logistics provider can take over and provide every subsequent function from factory gate to final delivery. As the distance between the manufacturer (i.e. the exporter) and the distributor or retailer is often quite considerable (and vice-versa for imports), problem relating to both material and information flows are common. Suppliers have to respond as quickly as possible to various situations within a specified time frame. If the supplier cannot do so, the multinational enterprise (MNE), as the focal firm in the supply chain, will probably choose another supplier. This creates a number of problems for a manufacturer as they not only have to manufacture goods on time, but they also need to deliver them on time becomes very crucial when MNEs use JIT management techniques.

Ibid, pp. 7

Value-Added Roles of Logistics in theEconomy The significant roles played by logistics industry in the economy are undeniable. Logistics is one of the major expenditures for businesses, thereby affecting and being affected by other economic activities.10 In the United States, for example, logistics contributed approximately 10.5 percent of GDP in 1996. U.S. industry spent approximately $451 billion on transportation of freight and about $311 billion on warehousing, storage, and carrying inventory. These and other logistics expenses added up to about $797 billion.11 In 1980, logistics expenditures accounted for around 17.2 percent of GDP. If logistics expenditure were still that high by 1996, an additional $510 billion would have been spent on logistics cost in the United States. This would translate into higher prices for consumers, lower profits for businesses, or both. The result could be a lower overall standard of living and/ or a smaller tax base. Thus, by improving the efficiency of logistics operations, logistics makes an important contribution to the economy as a whole.12 Logistics also support the movement and flow of many economic transactions; it is an important activity in facilitating the sale of virtually all goods and services. To understand this role from a system perspective, consider that if goods do not arrive on time, customers cannot buy them. If goods do not arrive in the proper place, or in the proper condition, no sale can be made. Thus, all economic activity throughout the supply chain will suffer.13 One of the fundamentals ways that logistics add value is by creating time and place utility. Time utility is the value added by having an item when it is needed. This could occur within the organizations, as in having all the materials and parts that are needed for manufacturing, so that the production line does not have to shut down. This occurs when the logistics function at Pillsbury delivers flour from one of its mills to a production facility so that cake mix may be produced on schedule. Or it could occur in the market place, as in having an item available for a customer when the customer wants it.14

10

Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1. 11 th Robert V. Delaney, CLIs 8 Annual State of Logistics Report, remarks to the National Press Club, Washington, DC (June 2, 1997), pp. 3-6 12 Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1.
13 14

Ibid, Chapter 1. Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1

This is closely related to place utility, which means having the item or service available where it is needed. If a product desired by consumers is in transit, in a warehouse, or in another store, it does not create any place utility for them. Without both time and place utility, which logistics directly supports, a customer could not be satisfied.15

Key Logistics Activities Outlined below are the key activities required to facilitate the flow of a product form point of origin to point of consumption. All of these activities, considered part of the overall logistics process.16 Customer service Demand forecasting/ planning Inventory management Logistics communications Material handling Order processing Packaging Parts and service support Plant and warehouse site selection Procurement Return goods handling Traffic and transportation Warehousing and storage

Customer Service For many organizations, customer service may be a key way to gain competitive advantage.17 Customer service has been defined as a customer-oriented philosophy which integrates and manages all elements of the customer interface within a predetermined optimum cost-service mix.18 Excellent customer service will help to increase customer satisfaction and getting all the five rights; right products, to the right customer at the right place, in the right condition and at the right time.

15 16

Ibid, Chapter 1 Ibid, Chapter 1 17 Joseph B. Fuller, James OConor, and Richard Rawlinson, Tailored Logistics: The Next Advantage, Havard Business Review 71, no. 3 (May June 1993), pp. 87 98. 18 Bernard J. La Londe and Paul H. Zinszer, Customer Service: Meaning and Measurement (Chicago: National Council of Physical Distribution Management, 1976), p. iv.

Case Study: L.L. Bean: Customer Service Excellence19 L.L. Bean is a catalog distributor of high-quality, durable outdoor clothing and sportswear. Located in Freeport, Maine, L.L. Bean has been widely noted as a leading company in providing excellent customer satisfaction and excellent customer service through its logistics/ distribution operations L.L. Bean receives most of its orders by telephone. It needs to respond quickly and accurately to filling and shipping customer orders for products that vary a great deal in size and shape. As a result, orders are filled manually. One of the secrets to L.L. Beans success is that, based on worker suggestions, it stock high sales volume items close to packing station. This minimizes excessive movement of product, reducing order-filling time and improving efficiency. L.L. Beans performance is phenomenal. It boast of a fill rate that averages 99.9 percent even during the Christmas season when it ships over 134,000 packages a day. As a result of its outstanding performance in distribution, many leading organizations, such as Xerox and Chrysler, have benchmarked L.L. Beans logistics operations.

Demand Forecasting/ Planning Logistics usually becomes involved in forecasting in terms of how much should be ordered from its suppliers (through purchasing), and how much of finish product should be transported or held in each market that the organizations serves.20 This required logistics participations in both production and marketing forecasting and planning. Types of forecast that can be discussed here is manufacturing forecast its production requirement based on sales demand and current balance on hand inventory levels. The other forecast is marketing forecasting customer demand based on pricing, competition, promotions, and so on. Forecasting itself is a complex activity which required involvement of various functions and forecast variables. Inventory Management Inventory management involves trading off the levels of inventory held to achieve high customer service levels with the cost of holding inventory, including capital
19

Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 2 20 Ibid, Chapter 1

tied-up in inventory, variable storage cost, and obsolescence. These costs can range from 14 to over 50 percent of the value of inventory on an annual basis!21 With high cost for items such as high-tech merchandise, automobiles, and seasonal items that rapidly become obsolete, many organizations include Hewlett-Packard, Xerox, and Sears, are giving inventory management much more attention.22 Logistics Communications Communications in logistics industry are becoming increasingly automated, rapid, and complex. This allowed logistics interfaces with various functions and organizations in modern communication processes. In order to ensure efficient functioning of any supply chain function, communication is the key. Part of WalMarts success can be attributed to computerized advance communication systems which links their suppliers to their actual customers sales on regular basis, so that the suppliers can plan based on up-to-date demand information, and provide timely and adequate replenishment to Wal-Marts stores.23 Figure 2-2 is showing Malaysians ambition in having single window development to enhance logistics communication in the country.24

21 22

Lambert, The Development of an Inventory Costing Methodology, pp. 104 - 24 Tom Davis, Effective Supply Chain Management, Sloan Management Review 34, no. 4 (1993), pp. 35 46. 23 Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1 24 Overview of Roadmap for the Development of the Freight Logistics Service Sector, Workshop for Malaysian th Freight Logistics, August 4 , 2010. http://www.slideshare.net/teamcouncil/overview-on-roadmap-for-thedevelopment-of-the-freight-logistics-services-sector

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Figure 2-2: Single Window Development: Malaysia logistics roadmap in developing the logistics communication to next level.

Material Handling Material handling encompasses all aspect of movement of raw materials, work in progress (WIP), or finished goods within a facility. A primary objective of material handling is to eliminate handling wherever possible because it can incurs cost without adding value for an organization each time an items moves or is handled. Some of the efforts taken to eliminate handling is includes minimizing travel distance, bottlenecks, loss due to waste, pilferage, mishandling, inventory levels, and damage. Order Processing Order processing is about getting orders from customers, checking on the status of orders and communicating to customers about them, and filling the order and making it available to the customer. The scope of order processing includes checking inventory status, invoicing, customers credits, and accounts receivable. As order processing lead time is a key area of customer interface, it can have a significant impact on a customers perception of service and therefore, satisfaction.

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Packaging In warehousing and storage, packaging is playing roles to provide protection during storage and transport. This is critical to quality for long distances over multiple transportation modes such as international shipping. Parts and Service Support After-sale service support is become a key function in ensuring customer satisfaction and business growth. In line with this, logistics become a player in responsible for providing after-sale service support. The after-sale service may include delivery of repair parts to dealers, stocking adequate spares, picking up defective or malfunctioning products from customers, and responding quickly to demands for repairs. Plant and Warehouse Site Selection Determining the location of the companys plant(s) and warehouse(s) is a strategic decision that affects not only the cost of transporting raw materials inbound and finished goods outbound, but also customer service level and speed of response.25 Lately, there has been extensive deal of competition for new manufacturing facilities. An example of this is Intel Corporations decision regarding where to locate a semiconductor facility. It received bids from a number of major cities, including Portland, Oregon; Austin, Texas; and Chandler, Arizona, a suburb of Phoenix. Ultimately, Intel chose Chandler because it already had a facility there, the Phoenix area was growing and had an attractive labor force, and the company had a good relationship with and was provided attractive incentives by the local government.26 Procurement In recent times, when the outsourcing of goods and services become an increasing trend, the procurement function plays a more significant role in the organizations. Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend, globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development are achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible requirements more
25

Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1 26 Intel Building $1.5 Billion Plant, Rocky Mountain Construction 74, no. 24 (Dec 20, 1993), pp. 15; and Willia m Carlisle, States Are Closing Firms Candy Store, Arizona Republic (July 24, 1994), pp. 1E 2E.

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rapidly. Activities related to obtaining products and materials from outside suppliers requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage, handling and quality assurance, many of which include the responsibility to coordinate with suppliers in scheduling, supply continuity, hedging, and research into new sources or programs. Return Goods Handling Return goods is also referred to as After Market Customer Service. Return goods is a process of planning, implementing and controlling the efficient, effective inbound flow and storage of secondary goods and related information opposite to the traditional supply chain direction for the purpose of recovering value or proper disposal. Many logistics company facing a tough time in handling return goods. The cost involved is very high. Traffic and Transportation One of key activity in logistics is to provide for the movement of goods and materials from point of origin to point of consumption. Transportation involves selection of the mode (e.g., air, rail, water, truck, or pipeline), the routing of the shipment, assuring of compliance with regulations in the region of the country where shipment is occurring and selection of the carrier.27

Warehousing and Storage Warehousing is part of organizations logistics system that stores products (raw materials, parts, goods-in-process, finished goods) at and between point of origin and point of consumption. It also involved in providing information to management on the status, conditions, and disposition of items being stored. Warehousing has transformed from a relatively minor facet of a firms logistics system to one of its most important function. Warehouse and storage functions related to ownership, design, warehouse layout, automation, training of employees, and related issues.

2727

Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1

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Module concept mapping Role of Logistics in Evolution of logistics & supply chains . Logistics activity is thousands of years old. . Logistics start to gain attentions in early 1900s . Development of supply chain divided into three timeline: - Creation era - Integration era - Globalization era Supply Chain Logistics service provider (LSP) .LSP play an important role in supply chain management . LSP also popularly known as 3PL. . 3PL now involved in the design, management, and control of firms supply chain. . 3PL considered as business partner to customer.

Introduction . Extend manufacturing enterprise bring new dimension of flow of information & materials across their supply chain. . The link between production & logistics processes in different organizations across geographically dispersed location is a key factor for competitive success.

Logistics key activity . Customer service . Demand forecasting/ planning . Inventory management . Logistics communications . Materials handling . Order processing . Packaging . Parts & service support . Plant & warehouse site selection . Procurement . Return goods handling . Traffic & transportation . Warehouse & storage

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Questions and Problems 1. Supply chain management has observed an evolution in three major movements. Discuss the three major movements. What are the developments has taken place? 2. What is logistics? As someone involved in logistics, what does you do? How do Logistics affect your organization? 3. Third party logistics (3PL) or logistics service provider is playing major role in supply chain management as more firms choose to outsource their logistics functions. How do you see their contribution to one organization? 4. For many organizations, Customer Service is a key way to gain competitive advantage. Discuss how the Customer Service function can help to improve logistics function? 5. How has the role and performance of logistics been enhanced by the growth of information technology?

Reading materials 1. Douglas M. Lambert, James R. Stock, Lisa M. Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998, Chapter 1 2. Gregory N. Stock, Noel P. Greis, John D. Kasarda, Enterprise Logistics and SupplyChain Structure: The Role of Fit. Journal of Operations Management 18 (2000)531-547, pp. 1. ftp://mail.im.tku.edu.tw/Prof_Shyur/Enterprise%20Information%20System/110806 14323905135.pdf. 3. BaharMovehedi, KavyanLavassani, Vinod Kumar, Implementation of B2B Ems for Supply Chain Integration: A Transitional Model, http://ebiz.uoregon.edu/poms2008/FullPapers/008-0054.pdf 4. Michael B. Stroh, What is Logistics? http://www.logisticsnetwork.net/articles/What%20is%20Logistics.pdf 5. Ruth Banomyong, Supply Chain Dynamics in Asia: Role of Logistics Providers in Handling Supply Chain, Asian Development Bank Institute Working Paper Series, No. 184, January 2010. pp.7. http://www.adbi.org/files/2010.01.07.Wp184.supply.chain.dynamics.asia.pdf 6. Robert V. Delaney, CLIs 8th Annual State of Logistics Report, remarks to the National Press Club, Washington, DC (June 2, 1997), pp. 3-6 7. Joseph B. Fuller, James OConor, and Richard Rawlinson, Tailored Logistics: The Next Advantage, Havard Business Review 71, no. 3 (May June 1993), pp. 87 98. 8. Bernard J. La Londe and Paul H. Zinszer, Customer Service: Meaning and Measurement (Chicago: National Council of Physical Distribution Management, 1976), p.iv. 9. Lambert, The Development of an Inventory Costing Methodology, pp. 104 24 10. Tom Davis, Effective Supply Chain Management, Sloan Management Review 34, no. 4 (1993), pp. 35 46. 11. Intel Building $1.5 Billion Plant, Rocky Mountain Construction 74, no. 24 (Dec 15

20, 1993), pp. 15; and William Carlisle, States Are Closing Firms Candy Store, Arizona Republic (July 24, 1994), pp. 1E 2E. 12. Overview of Roadmap for the Development of the Freight Logistics Service Sector, Workshop for Malaysian Freight Logistics, August 4th, 2010. http://www.slideshare.net/teamcouncil/overview-on-roadmap-for-thedevelopment-of-the-freight-logistics-services-sector

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