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LOGISTICS MANAGEMENT

1. Introduction to Logistics and Supply


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