Chain Management Prof. Alessandro Perego Politecnico di Milano 1. Introduction to Logistics and Supply Chain Management 2 Learning objectives
! Logistics and Supply Chain Management: key- words and definitions ! The evolution of the Logistics concept from Physical Distribution System Management in the 70s to Supply Chain Management in the 90s ! A 3-stack model of Logistics/Supply Chain Management : from logistics execution, to supply chain planning, to supply chain design and strategy ! The main activities of Logistics Management ! Why Logistics and Supply Chain Management are key Business Management topics 1. Introduction to Logistics and Supply Chain Management 3 2. The 3 stacks of logistics management 1.Logistics and supply chain management Agenda 3. The importance of Logistics 1. Introduction to Logistics and Supply Chain Management 4 Logistics Management Logistics Management is that part of supply chain management 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.
CSCPM (Council of Supply Chain Management Professionals)
1. Introduction to Logistics and Supply Chain Management 5 Council of Supply Chain Management Professionals (www.cscmp.org) Founded in 1963, it is the preeminent association for individuals involved in supply chain management
CSCMP was originally founded as the National Council of Physical Distribution Management (NCPDM) in January 1963. NCPDM was formed by a visionary group of educators, consultants, and managers who envisioned the integration of transportation, warehousing, and inventory as the future of the discipline. At that time, physical distribution was just beginning to edge its way into the corporate lexicon and make its considerable presence felt in the business community.
In 1985, recognizing the growing field of logistics, the association's focus broadened as it changed its name to the Council of Logistics Management (CLM). It stayed that way until 2004 when CLM's Executive Committee voted to become CSCMP, the Council of Supply Chain Management Professionals (CSCMP)
1. Introduction to Logistics and Supply Chain Management 6 Time Integration scope 1960 1970 1980 1990 2000 Distribution of finished products Internal Supply Chain External Supply Chain Physical Distribution Management, Materials Management Integrated Logistics (Materials Management + Physical Distribution) Supply Chain Management The evolution of Logistics 1. Introduction to Logistics and Supply Chain Management 7 The evolution of the logistics concept: distribution A term employed in manufacturing and commerce to describe the broad range of activities concerned with efficient movement of finished products from the end of production line to consumer, and in some cases includes the movement of raw materials from the source of supply to the beginning of the production line. NCPD (National Council of Physical Distribution Management), 1967 ! Efficient: emphasis on cost reduction ! From production line to consumer: emphasis on the distribution system ! Movement of finished products: emphasis on materials handing and transportation 1. Introduction to Logistics and Supply Chain Management 8 INTEGRATION OF PARTS OF THE INTERNAL SUPPLY CHAIN FOCUS DISTRIBUTION OF THE END PRODUCTS or SUPPLY OF RAW MATERIALS/PRODUCTION SINGLE COMPANY REDUCTION OF THE DISTRIBUTION or SUPPLY/PRODUCTION COSTS Suppliers Customers Supply Production Distribution Physical Distribution/Materials Management 1. Introduction to Logistics and Supply Chain Management 9 Physical Distribution Management ! Focus: distribution of end products with a systemic view of transportation, storage, inventory management, packaging and materials handling ! Methodologies: systemic approach, total cost analysis, trade-off analysis, operational research techniques (inventory management models, demand forecasting algorithms, site location, etc.) ! Organization: Distribution Manager ! Awareness: the National Council of Physical Distribution Management is founded in 1963
1. Introduction to Logistics and Supply Chain Management 10 Time Integration scope 1960 1970 1980 1990 2000 Distribution of finished products Internal Supply Chain External Supply Chain Integrated Logistics (Materials Management + Physical Distribution) Supply Chain Management The evolution of Logistics Physical Distribution Management, Materials Management 1. Introduction to Logistics and Supply Chain Management 11 The evolution of the logistics concept: integrated logistics
The integration of two or more activities for the purpose of planning, implementing, and controlling the efficient flow of raw materials, in-process inventory and finished goods from point-of-origin to point-of-consumption. NCPD (National Council of Physical Distribution Management), 1976
! Integration: emphasis on the value of global optimization (as opposed to local optimization) ! Plan, implement and control: not only execution, emphasis on logistics as a business management discipline ! From point of origin to point of consumption: first inclusion of the (internal) supply chain perspective 1. Introduction to Logistics and Supply Chain Management 12 The evolution of the logistics concept: integrated logistics
The process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point-of-origin to point-of- consumption for the purpose of conforming to customer requirements. CLM (Council of Logistics Management),1985
! Process: it is the first explicit recognition that Logistics is a process ! Related information: not only flow of goods but also flow of information ! Conforming to customer requirements: it is the ultimate objective of logistics, not only efficiency and cost.-effectiveness 1. Introduction to Logistics and Supply Chain Management 13 The evolution of the logistics concept: integrated logistics
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. CLM (Council of Logistics Management), 1992
! Effective: not cost-effective but effective tout court ! Services: logistics management applies also to the provision of services (healthcare, after-sales, engineering&contracting, ) 1. Introduction to Logistics and Supply Chain Management 14 INTEGRATION OF THE INTERNAL SUPPLY CHAIN FOCUS SUPPLY+PRODUCTION+DISTRIBUTION SINGLE COMPANY REDUCTION OF THE OVERALL LOGISTICS COSTS Integrated Logistics Suppleirs Customers Supply Production Distribution 1. Introduction to Logistics and Supply Chain Management 15 Integrated Logistics
! Focus: focus on the overall logistics system with the integration of the different sub-processes of Materials Management, Production Management, Physical Distribution ! Methodologies: systemic approach, total cost analysis, integrated planning principles, competitive value of the customer service ! Organization: Logistics Manager ! Awareness: the National Council of Physical Distribution Management becomes the Council of Logistics Management 1. Introduction to Logistics and Supply Chain Management 16 Time Integration scope 1960 1970 1980 1990 2000 Distribution of finished products / Supply of raw materials Internal Supply Chain External Supply Chain Integrated logistics (Materials Management + Physical Distribution) Supply Chain Management The evolution of Logistics Physical Distribution Management, Materials Management 1. Introduction to Logistics and Supply Chain Management 17 raw material supply raw material storage manufactu ring finished goods storage Market (user or custome r) Plant Plant Warehouse Warehouse Warehouse Storage Storage Storage Inbound supply chain Outbound supply chain The Supply Chain It includes the different members, infrastructures and resources, processes and activities (and all the links among them) that allow the replenishment of raw materials, their transformation in components and products and the distribution of products to end customers 1. Introduction to Logistics and Supply Chain Management 18 The Food Supply Chain Logistics Service Providers Raw materials suppliers Wholesalers HO.RE.CA Wholesalers Catering (big chains) Small shops Customers Large Retailers Manufacturers 1. Introduction to Logistics and Supply Chain Management 19 The Pharma Supply Chain L o g i s t i c s
s e r v i c e
p r o v i d e r s
Raw materials suppliers Outsourcers Packaging suppliers Hospitals Pharmacies Distributors 3rd party logistic providers Manufacturers 1. Introduction to Logistics and Supply Chain Management 20 The evolution of the logistics concept: supply chain management Logistics Management is that part of supply chain management 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. CSCPM (Council of Supply Chain Management Professionals), 2009
! Part of supply chain management: Logistics is part of a more comprehensive concept, Supply Chain Management ! Reverse flow: Logistics is also about the reverse flow of goods and information from the point-of-consumption backward 1. Introduction to Logistics and Supply Chain Management 21 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. CSCPM (Council of Supply Chain Management Professionals)
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.). 1. Introduction to Logistics and Supply Chain Management 22 INTEGRATION OF THE EXTERNAL SUPPLY CHAIN FOCUS ENTIRE SUPPLY CHAIN VALUE OF THE CUSTOMER SERVICE OVERALL LOGISTICS COST TO SERVE THE FINAL CUSTOMER SUPPLY CHAIN BASED COMPETITION Supply chain management Suppliers Customers Supply Production Distribution 1. Introduction to Logistics and Supply Chain Management 23 Supply chain management ! Focus: focus on the Supply Chain as a whole; competition among supply chains; logistics as a differentiation lever ! Methodologies: analysis of supply chain performance, supply chain integration, collaborative planning models (VMI, CPFR) ! Organization: Supply Chain Manager ! Awareness: the Council of Logistics Management becomes the Council of Supply Chain Management Professionals
Strategic approach where: ! 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 Supply Chain Based Competition 1. Introduction to Logistics and Supply Chain Management 24 What is the amount of inventory (of finished products) in the warehouses of manufacturers and retailers? ! 40 days of inventory (on average) in the warehouses of the manufacturers (including both cycle and safety stock) ! 20 days of inventory in the warehouses of the retailers (both distribution centres and backrooms) (including safety, cycle and speculative stock) What is the average value of the on-shelf availability in the stores of the retailers? ! 93% as an average of all the the different types of products. This means that 7 times out of 100, consumer does not find what he is looking for (Source: GS1 Europe) Performances of the FMCG supply chain 1. Introduction to Logistics and Supply Chain Management 25 How much does the order-delivery-invoicing-payment cycle cost? ! Approximately 80 !/cycle (from order to payment), of which 50% due to the management of the activities generated by errors ! equally split among manufacturer and retailer (Source: Electronic Invoicing Observatory - Politecnico MI)
What is the average saturation of the means of transportation used by manufacturers to deliver their products to retailers? ! Approximately 70% for the single trips (do hope that returns are not empty!) ! with a very limited adoption of multi-dropdeliveries Performances of the FMCG supply chain 1. Introduction to Logistics and Supply Chain Management 26 1. Introduction to Logistics and Supply Chain Management 27 2. The 3 stacks of logistics management 1.Logistics and supply chain management Agenda 3. The importance of Logistics 1. Introduction to Logistics and Supply Chain Management 28
source Suppliers PERFORMANCE MEASUREMENT SYSTEM SUPPLY CHAIN PLANNING LOGISTICS EXECUTION stock make deliver SUPPLY CHAIN DESIGN AND STRATEGY The 3 stacks of logistics management Decision level Operatio nal Tactical Strategic Demand Inventory Distribution Produc- tion Supply ! " PERFORMANCE MEASURES Logistic costs # Customer service 1. Introduction to Logistics and Supply Chain Management 29 1. Logistics Execution Logistics Execution includes the design and management of the processes that support the flow of materials (handling, storage, physical transformation and transport activities) and data/documents along the supply chain
! 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) Company A Transport Trasforma - zione fisica Stoc - caggio Picking Messa a Stoc - caggio Physical - transform. Warehouse Picking Receiving Storing Stoc - Warehouse - Shipping 1. Introduction to Logistics and Supply Chain Management 30 2. Supply Chain Planning Supply chain 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
! 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 Demand Planning Inventory Planning Distribution Planning Production Planning Procurement Planning CUSTOMERS SUPPLIERS 1. Introduction to Logistics and Supply Chain Management 31 3. Supply chain design and strategy Supply chain design and strategy aims at defining: (1) the logistics network structure (supply network, production network and distribution network) (2) the transportation modes (road, rail, ship, inter-modal, etc.) (3) the make or buy policies
! These decisions must be strongly aligned with the overall company 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 1. Introduction to Logistics and Supply Chain Management 32 LOGISTICS PROCESS Performance measurement Gap analysis Environment Objective performances The performance measurement system Main choices: ! the metrics ! the measurement techniques ! the process: phases, responsibilities, frequency, reports, etc. Actions 1. Introduction to Logistics and Supply Chain Management 33 2. The 3 stacks of logistics management 1.Logistics and supply chain management Agenda 3. The importance of Logistics 1. Introduction to Logistics and Supply Chain Management 34 34 Importance of Logistics and Supply Chain Management In a nutshell the importance of logistics and supply chain management (L&SCM) depends on the following reasons: ! L&SCM are non-discretionary activities that must be accomplished to deliver the right value to the right customer ! These activities are costly: L&SCM related costs represent on average between 5 and 15% of revenues and more if a supply chain perspective is taken ! They have a substantial impact on the assets of a company (inventories, manufacturing plants, transport vehicles, ) ! . 1. Introduction to Logistics and Supply Chain Management 35 Cost of logistics as % of sales Administration Inventory Warehousing Transportation 1987 5,9% 2,4% 2,5% 1,3% 1993 3,9% 1,8% 1,7% 1,2% 1998 2,8% 1,6% 1% 1% 2003 3,1% 1,5% 0,8% 0,8% 2008 3,5% 1,8% 1,2% 0,8% 2013 3,8% 1,8% 1,3% 0,8% 12,1% 8,5% 6,4% 6,1% 7,3% 7,7% -30% -25% -4% +20% +5% Source: European Logistics study 2008-2009 (ELA AT Kearney) Globalization: export grows more than GDP 1. Introduction to Logistics and Supply Chain Management 36 Source: World Economic Outlook Database, October 2013 (International Monetary Fund) The evolution of the market Trends in factors of production in Europe 1. Introduction to Logistics and Supply Chain Management 37 60 80 100 120 140 160 2009 2010 2011 2012 2013 (*) Fuel Energy Price of money Costs of renting Labour costs - employees Labour costs - external workers (*)Values referred to the first 8 months of 2013 In the last years the logistics sector has been facing an increase in the costs of the factors of production (most of all labour, energy and fuel) 1. Introduction to Logistics and Supply Chain Management 38 INDUSTRY War. Admin. Invent. TOTAL Publishing 3,0% 2,1% 3,6% Electric appliances 2,6% 2,9% 4,6% Wholesalers 3,0% 2,2% 2,9% Food & beverage 2,2% 1,7% 2,8% Consumer electronics 2,0% 2,5% 3,8% Chemical 2,3% 1,5% 2,6% Mechanical 2,2% 1,9% 2,9% Automotive 2,3% 1,2% 2,7% Retail 3,0% 1,6% 2,0% Pharmaceutical Transp. 4,7% 2,5% 2,9% 3,7% 2,0% 3,8% 2,3% 2,7% 2,3% 2,2% 2,0% 2,1% 2,5% 13,4% 12,6% 11,0% 10,4% 10,3% 10,2% 9,3% 8,9% 8,9% 8,8% The incidence of the logistic costs on the revenues Source: ELA-AT Kearney (early 2000s) The incidence of logistic costs An analysis by industry Cost of logistics as % of sales in different industries 1. Introduction to Logistics and Supply Chain Management 39 Source: the Benchmarking Institute 2007 1. Introduction to Logistics and Supply Chain Management 40 Politecnico di Milano (early 2000s) The incidence of logistic costs An analysis by supply chain: the textile apparel Logistic costs Net margin Industrial costs Added value Suppliers Manufact. Distributors Overall supply chain 10 1,8 3,2 23 4 3,3 35 11,5 8 69 14,5 16,5 15,3 30,3 54,5 100 22 15,5 1,5 22,8 6,8 4,5 6 43 22,3 12,7 6,5 55,2 100 Financial cost (inventories) Obsolescence costs Other costs (administration, quality, ) Transportation and handling 2 3 5 15,5 49,5 6,2 Suppliers Manufact. Distributors Overall supply chain 1. Introduction to Logistics and Supply Chain Management 41 41 Importance of Logistics and Supply Chain Management In a nutshell the importance of logistics and supply chain management (L&SCM) depends on the following reasons: ! L&SCM are non-discretionary activities that must be accomplished to deliver the right value to the right customer ! These activities are costly: L&SCM related costs represent on average between 5 and 15% of revenues and more if a supply chain perspective is taken ! They have a substantial impact on the assets of a company (inventories, manufacturing plants, transport vehicles, ) ! Last but not least L&SCM affects the top line of the profit&loss, i.e. revenues (customer service, lost sales, ) 1. Introduction to Logistics and Supply Chain Management 42 Customer service Many customer service factors are strongly affected by the logistic process and should be considered as key performance indicators of the process itself: ! the order-delivery cycle time ! the delivery accuracy ! the order fill rate ! tracking information from order to delivery !
Input (resources) Output Customers CUSTOMER SERVICE LOGISTIC PROCESS 1. Introduction to Logistics and Supply Chain Management 43 Product
Price
Customer service
Promotion Food Chemical Pharmac Auto Paper Electronics Textiles Total 34,8
25,8
20,0
19,4 33,0
34,8
19,1
13,1 36,9
29,4
17,3
16,4 26,8
29,8
33,5
9,9 23,2
35,8
28,9
12,1 41,3
26,5
21,8
10,4 34,7
22,0
22,8
20,5 33,3
29,9
22,4
14,4 Importance of Marketing Variables by Industry Council of Logistics Management 1988 The weight of marketing mix variables = the most important variable in the industry = the second most important variable Already 20 years ago the importance of Customer Service was in line with the importance of more traditional product mix variables such as price and product Service level expected by the customers of the Logistic Service Providers (LSPs) 1. Introduction to Logistics and Supply Chain Management 44 96% 96,3% 98,3% 98,8% 97,1% 98,4% 98,9% 96,2% 93,2% 93,7% 91,7% 89% 93% 92,2% 88,2% 88 % 1993 1998 2003 2008 1993 1998 2003 2008 Service level expected by the customers of the LSPs Service level given by LSPs On time deliveries Complete deliveries Source: European Logistics study 2008-2009 (ELA AT Kearney) 1. Introduction to Logistics and Supply Chain Management 45 Supplementary Readings
! Cooper, Lambert, Pagh, 1997, Supply chain management: more than a new name for logistics, International journal of logistics management, volume 8, pp.1-14 ! Coyle, Bardi, Langley, Supply Chain Management, The management of business logistics, a supply chain perspective, pp. 1-73 1. Introduction to Logistics and Supply Chain Management 46 Relevant websites
Logistics and Supply Chain Management association websites: ! www.cscmp.org ! wwww.elalog.org ! www.sole.org Practitioner Websites and industry insights: ! www.logisticsworld.com ! www.logistics.about.com ! www.logisticstoday.com ! www.supply-chain.org ! www.logisticsmanager.com ! www.scmr.com ! www.supplymanagement.co.uk 1. Introduction to Logistics and Supply Chain Management 47 Challenge questions
! Suppose you are asked to tell why Logistics is not only Warehousing and Transportation. What would be your line of reasoning? Which could be the activities under the responsibility of a Logistics or Supply Chain Executive? ! What is the main idea behind the foundation of Logistics as a new discipline? ! What is the difference between Logistics and Supply Chain Management? ! Build a strong case in favour of the following statement: Logistics is crucial for a Retailer in the Fast Moving Consumer Goods sector