Logistics and Supply Chain

Management
Part I

An Introduction

ESI 4554
ISE Senior Design

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 Logistics
Definition
“Logistics…
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”

Council on Logistics Management

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 Logistics
Definition
 The flow of material, information and money
between consumers and suppliers.
 In 1990-96:
 Freight Transportation $352, $455 Billion

 Inventory Expense $221, $311 Billion

 Administrative Expense $27, $31 Billion

 Logistics related activity 11%, 10.5% of GNP.

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 Logistics Costs
Cost Category Total Cost ($ % of Sales % of Logistics
Billion Costs
Transportation $590 5.9% 58.4%

Warehousing $78 .8% 7.9%

Inventory $299 3.0% 29.7%

Admin. $39 0.4% 4.0%

Total $1,006 10.1% 100.0%

Logistics costs are estimated about 10% of sales

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Source: Delaney, R. - Cass Logistics Annual State of Logistics report, 2001
Logistics in the Manufacturing Firm

 Profit 4% Profit
Logistics
Cost
 Logistics Cost 21%
Marketing
Cost

 Marketing Cost 27%

Manufacturing
 Manufacturing Cost 48% Cost

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 Logistics vs. Supply Chain Management
What is the difference?
 A Supply chain is the network of:
 facilities (warehouses, factories, terminals, ports,
stores, homes)
 vehicles (trucks, trains, planes, ships)
 logistics information systems
connecting suppliers’ suppliers with its customers’
customers.

 Logistics is:
 “what happens in the supply chain”
 “putting the right material in the right place at the right
time“
 it provides much of the Supply Chain’s value-added.
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Flows in a supply chain

Information

Product

Funds

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 History of Logistics
 Private industry starts evolving since the
1940’s.
 Military were the only ones to using the term
(1950’s, 60’s)
 No true concept of the term in the private
industry.
 Companies had departments, such as
material housing, warehousing, machining,
etc.
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 History of Logistics

Global
Logistics
Scope & Influence

Supply Chain
Logistics

Corporate
Logistics
Facility
Logistics
Workplace
Logistics

1950's 1960's 1970's 1980's 1990's

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Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
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Phases of Logistics Development
1. Workplace Logistics

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Phases of Logistics Development
1. Workplace Logistics
Definition:
 the flow of material at a single workstation.
Objective:
 to streamline the movements of an individual
working at a machine or assembly line.
Origins:
 Principles developed by fathers of Industrial
Engineering during and after WWII.

 Also known as: Ergonomics.

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 Phases of Logistics Development
2. Facility Logistics

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Phases of Logistics Development
2. Facility Logistics
Definition:
 the flow of material between work stations
within the four walls of a facility
(interworkstation, intra facility).
 Facility can be a factory, terminal, warehouse,
distribution center (DC).
Origins:
 developed in mass production assembly lines
in 1950’s, 60’s and 70’s.
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Phases of Logistics Development
3. Corporate Logistics
(Soda Manufacturer)

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Phases of Logistics Development
3. Corporate Logistics
Definition:
 the flow of material and information between
the facilities and processes of a corporation.
(inter workstation, inter-facility, intra-
corporate).

Objective:
 Develop and maintain a profitable customer
service policy while maintaining and reducing
total logistics cost.
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 Phases of Logistics Development
Logistics
3. Corporate
Logistics takes place and
between

Manufacturers Its factories Warehouses

Wholesalers Distribution Centers

Its distribution
Retailers Retail Stores
centers (DCs)
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Phases of Logistics Development
4. Supply Chain Logistics

Supplier Manufacturer Wholesaler Retailer Customer

Supply chain is optimized when material,

information and money flow simultaneously,
in real time, and paperless.

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Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
 Supply Chain Stages
SC: Supplier to Consumer
MC: Manufacturer to Consumer
WC: Wholesaler to Consumer

Supplier Manufacturer Wholesaler Retailer Customer

Supplier Manufacturer Wholesaler Retailer Customer

Supplier Manufacturer Wholesaler Retailer Customer

SW: Supplier to Wholesaler

SR: Supplier to Retailer 21
MR: Manufacturer to Retailer
Phases of Logistics Development
4. Supply Chain Logistics
Definition:
 the flow of material, information and
money between corporations
(interworkstation, interfacility,
intercorporate, and intrachain).

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Phases of Logistics Development
5. Global Logistics
Definition:
 The flow of material, information, and
money between countries.
 Connects suppliers’ suppliers with its
customers’ customers internationally.
 Much more complicated than domestic
logistics given the many languages, laws,
currencies, time zones, cultures, etc.
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Phases of Logistics Development
5. Global Logistics

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What Activities take place in Logistics?
Activities
1. Customer Response
2. Inventory Planning &
Management (IP&M)
3. Supply
4. Transportation
5. Warehousing /
DC Operations

Each of these requires:

- Measures and Goals
- Process Design
- Information System Requirements
- Organizational Development
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Logistics Activity Framework

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Logistics Activity Framework

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 Logistics Activities
1. Customer Response

Involves:
• Developing / Maintaining a Customer Service
Policy*
• Order Entry
• Order Processing
• Invoicing / Collections
• Monitoring Customer Satisfaction
(* the contract between the logistics organization and the customer,
defining service targets, such as fill rates, response times, min. order
quantities, terms and conditions for returns, etc.).
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Logistics Activity Framework

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 Logistics Activities
2. Inventory Planning &
Management
Goal:
 determining / maintaining the lowest inventory
levels possible that will meet Customer Service
Policy requirements.
Involves:
 Forecasting
 Order Quantity Engineering
 Replenishment planning
 Inventory deployment 30
Logistics Activity Framework

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 Logistics Activities
3. Supply
Goal:
• Minimize total acquisition cost
(TAC) while meeting availability, response time
and quality requirements

Involves:
• Developing / Maintaining a Supplier Service Policy
• Sourcing (of supplies)
• Supplier integration
• Purchase Order processing
• Buying and Payment 32
Logistics Activity Framework

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 Logistics Activities
4. Transportation
Links sources of supply with customers.
Goal:
 Link all pick-up and deliver-to points within the response
time requirements and transportation limitations at the
lowest possible cost.

Involves:
 Network design & optimization
 Shipment Management
 Fleet and Container Management
 Carrier Management
 Freight Management 34
Logistics Activity Framework

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 Logistics Activities
5. Warehousing (DC Operations)

Goal:

 To minimize the cost of labor, space and equipment in

the warehouse while meeting cycle time and shipping
accuracy and storage capacity requirements.
Involves:
 Receiving
 Putaway
 Storage
 Order Picking
 Shipping 36
 Logistics involves Optimization
Optimization is a key ingredient in
Logistics Master Planning
In general, we optimize:

- Customer Service Policy (CSP)

- purchase order quantities
- product sources (which one is best)
- location of DCs
- product placement in the warehouse

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 Logistics involves Optimization
Example
If we want to optimize CSP, we would address the
Total Logistics Costs
( = inventory cost + response time cost + lost sales cost)

MIN Total Logistics Costs

Subject to
 Inventory Availability > Customer Service Inventory
Target
 Response time < Customer Service Response time
Target
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 Logistics Activity Profiling and Data Mining
What is Data Mining?
 The process of automatically searching large volumes
of data for patterns using tools such as classification,
association rule mining, clustering, etc..
 A class of database applications that look for hidden
patterns in a group of data that can be used to predict
future behavior.
 True data mining software doesn't just change the
presentation.
 Actually discovers previously unknown relationships
among the data.
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 Logistics Activity Profiling and Data Mining
What is Profiling?
Definition
The systematic analysis of item and order activity
used to:
· quickly identify root cause of material/information
flow problems.
· Identify opportunities for improvement.
· Provide basis for decision making.
· First step in logistics master planning.
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 Logistics Activity Profiling and Data Mining
What is a Profile?
 A snapshot or picture of an aspect of a
logistics activity.
 Many different profiles will be needed to
fully characterize and re-engineer the
logistics enterprise.
 Provides basis for decision making.
 First step in logistics master planning.
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 Logistics Activity Profiling and Data Mining
What is a Logistics Activity Profile?
Definition
The compilation of profiles for flow of material, information and money
for each of the major logistics activities.
Logistics Activity Flow of
Flow of Information Flow of Money
Profiles Material

1. Customer Response √ √ √

2. Inventory Planning &

√ √ √
Management (IP&M)

3. Supply √ √ √

4. Transportation √ √ √

5. Warehousing √ √ √
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 Logistics Activity Profiling and Data Mining
Result:
Five basic sets of activity profiles
1. Customer Activity Profile (CAP)

2. Inventory Activity Profile (IAP)

3. Supply Activity Profile (SAP)

4. Transportation Activity Profile (TAP)

5. Warehouse Activity Profile (WAP)

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 Logistics Activity Profiles
Result:
Typically a profile will exist for the activity, the
item, and the activity-item pair (and many other
relevant ones).

Examples:
 Customer Sales Activity Profile
 Item Sales Activity Profile
 Customer - Item Sales Activity Profile

 Supplier Activity Profile

 Item Purchasing Activity Profile
 Supplier - Item Purchasing Activity Profile
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 Logistics Activity Profiling and Data Mining
What are Segments?
Segments represent and classify something according to
some criteria into A, B, C (usually) or more groups.

Example: Customers and Items sold

Customer Segments (typical)

 A Category: the top 5% of customers

 B Category: the next 15% of customers

 C Category: the bottom 80% of customers

Item Segments (typical)

 A Category: represents 80% of sales
 B Category: represents 15% of sales
 C Category: represents 5% of sales
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Example: Customer – Item Sales Activity Profile

70
60
50
% of Sa le s 40
Volum e 30

20
10 C
B Ite m
0
A Ca te gorie s
A
B
C
Custome r Ca te gorie s

Item Category A – 80% of Sales B – 15% of Sales C – 5% of Sales

Customer Category

A – Top 5% AA AB AC

B – Mid 15% BA BB BC

C – Bottom 80% CA CB CC
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 Logistics Activity Profiling and Data Mining
What are Segments?
 Segments are a type of classification system.
 The more you know about your customers, the more likely
you will offer the right product’ at the right time and the
right place, and the right price.
 Pareto Principle: 80% of your sales & profits come from
20% of your customers.
 Create A, B, C, D segments
 A: Customers deliver largest portion of revenue
 B: Close second, followed by C and D.
 Recognize each group’s characteristics. 47
 Logistics Activity Profiling and Data Mining
Fine tune each Segment (A, B, C, D Customers)
 How many products/services do they buy?
 Purchase frequency?
 Type of business?
 Profitability of each transaction?
 Payment promptness?
 Cost of the service?
 Referrals provided?

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 Logistics Activity Profiling and Data Mining
Once Segments are fine tuned & sub classified, plan
to promote customers from one category to the next highest:

Ex. from C to B, from B to A

An “A” customer is the hardest to replace.

Need replacements in case customers go “elsewhere”.

If you loose an “A” customer, promote a good “B” customer

to replace it.

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 Logistic Activity Profiles
What does each profile tell us?
1. Customer Activity Profile (CAP):
 illustrates sales activity by customer and by item.
 captured in terms of dollars, # of orders, # of order
lines, units, weight, cube, truckloads, pallets and
cases.
 different items and customers create different
level / type of logistics
 logistics strategy must reflect unique logistics
requirements of each customer – item
combination.
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 Logistic Activity Profiles
1. Example of a Customer Activity Profile (CAP)

70
60
50
% of Sales 40
Volume 30
20
10
0
C
A Item
B B
Customer A Categories
C
Categories

How to understand example:

 Very few customers or items can be found in AA segment, yet it has high volumes,
high revenues and intense competition
 Many customers and items are found in the CC segment, yet it has low volumes, 51
low
revenues and little or no competition
 Logistic Activity Profiles
Definition - SKU
 The abbreviation for Stock Keeping Unit.

 An SKU is an individual item or part, a unit of

inventory that is carried as a separate identifiable
unit, and is typically represented by a UPC.

 i.e. A box of 100 ball point pens, although

containing the same unit, is a different SKU from a
single ball point pen.
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 Logistic Activity Profiles
Another Example of a Customer Activity Profile (CAP)

300

200
Units
Purchased
100

C SKUs
0
B SKUs
A
B A SKUs

Customer Categories C
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 Logistic Activity Profiles
What does each profile tell us?
2. Inventory Activity Profile (IAP):

 helps determine opportunities to reduce inventory

and improve customer service.

 shows locations in the supply chain where excess

has accumulated.

 reports inventory turns, days-on-hand, other.

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 Logistic Activity Profiles
Examples of Inventory Activity Profile (IAP):
ABC Inventory Valuation Analysis

S= Store
T= Transit
W = Warehouse

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 Logistic Activity Profiles
What does each profile tell us?
3. Supply Activity Profile (SAP):

 reveals opportunities for purchasing improvements

 reports purchasing in $, units, cases, pallets,

truckloads, weight, volume, orders, SKU, supplier,

other.

 helps categorize suppliers, make / buy analysis, etc

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 Logistic Activity Profiles
Example of Supply Activity Profile (SAP)
Supplier – Item Classification

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 Logistic Activity Profiles
Example of Supply Activity Profile (SAP):

Inbound Logistics Strategy and Stratification

Supply Dry Grocery Perishables Clothing Health/Beauty Housewares Promos.

Plan A B C D A B C D A B C D A B C D A B C D
SuppliersA VMI VMI VMI VMI Cns
B VMI VMI VMI VMI Cns
C Cns
D Cns

Cross Dock DC Eliminate VMI Vendor Man. Inv. Cns Consignment

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 Logistic Activity Profiles
What does each profile tell us?
4. Transportation Activity Profile (TAP):
For each transportation lane, reports:

 units, cases, pallets, truckloads, weight, volume,

dollars moved, carrier availability, statistics, on-
time percentage, damage and claims rates.

 Helps measure carrier performance, routing,

scheduling, consolidation opportunities.

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 Logistic Activity Profiles
Example of Transportation Activity Profile (TAP):
Multi commodity transportation activity profile
in the chemical industry.

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 Logistic Activity Profiles
What does each profile tell us?
5. Warehouse Activity Profile (WAP)
Helps reveal patterns in item activity and customer orders to
help improve:
 storage system design
 warehouse layout
 order activity profile

Captures: requests, units, cases pallets, dollars, weight

shipped per unit time.

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 Logistic Activity Profiles
What does each profile tell us?
5. Warehouse Activity Profile (WAP)
 Helps choose and design a storage system for each
item.
 Helps design order picking and shipping systems.
Typically includes distributions such as:
 Order mix by Family
 Lines per order

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 Logistic Activity Profiles
Example of Warehouse Activity Profile (WAP):
Lines per Order Distribution

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 Logistic Activity Profiles
Example of Warehouse Activity Profile (WAP):
Item Popularity Distribution

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 Video

Supply Chain Management

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