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Overview of Logistics and supply chain

The objectives are: identify and explain logistics definition and concepts that are relevant to managing the supply chain; identify how supply chains compete in terms of time, cost and quality; show how different supply chain may adopt different and distinctive strategies for competing in the market place By the end of the session, you should be able to: understand how supply chain are structured; understand different ways in which supply chains may choose to compete in the marketplace; understand the need to align supply chain capabilities with the needs of the end customer

Logistics and the supply chain

What is the supply chain, and how it is structured? What is the purpose of supply chain? My lecture notes [1]- Overview.doc

As sumary from Tesco example: Logistics is the task of providing: material flow of the physical goods from suppliers through the distribution centers to the stores; information flow of demand data from the consumer back to purchasing and to suppliers so that material flow can be accurately planned and controlled.

The logistics task of managing material flow and information flow is a key part of the overall task of supply chain management. Supply chain management is concerned with managing the entire process of raw materials supply, manufacture, packaging and distribution to the end customer. The definition of supply chain management used in this note is as follows: The alignment of upstream and downstream capabilities of supply chain partners to deliver superior value to the end customer at least cost to the supply chain as a whole.

Christopher (1998) defines logistics as: Strategically managing procurement, movement and storage of materials, parts and finished product inventory and the related information flows, through the organization and its marketing channels in such a way that the current and future profitability are maximized through the costeffective fulfillment orders.

Main logistics activities and decisions: cooperate with marketing to set customer service levels, (include order fulfillment, demand forecasting) facility location decisions transportation activities (eg. transportation mode selection, vehicle scheduling, carrier routing ), inventory management (inventory short -term forecasting, planning and control, cooperate with production to calculate EOQ, sequence and time production), information collection and flows and order processing, warehousing and materials handling, packaging and packing, production planning and scheduling procurement return goods handling parts and service support salvage and service disposal


Downstrea m Tier 1 Customer s Our Organisation Tier 2 Customer s

P r i m a r y M a n u f a c t u r e r

Tier 2 Supplier s

Tier 1 Supplier s

E n d
C u s t o m e r s

Supply side

Demand side

Purchasing and supply

Physical distribution

Inbound logistics Supply Chain Management

Outbound logistics

Supply chain management requires a logistics model based on quick order to delivery response. A model which focuses from vendors' doors through to delivery to customers' doors. The model must meet the customers' demanding and specific requirements. It requires organizational flexibility and responsiveness, internal and external teamwork and demands the use of processes and technology.

The customer requirements may vary by customer, but they do have certain consistencies to logistics-Quick response to orders from order receipt through shipment to invoicing Complete and accurate orders / no backorders Delivery windows or appointments Special shipment preparation as to packaging, marking, labeling, stenciling, slip sheets or pallets, etc. Bar coding EDI (Electronic Data Interchange) Carrier selection

Effects of Supply Chain Management

Benefits The initial benefits of supply chain management accrue to the customer, the initiator of this supply chain. He (the customer) earns the reduction in inventories by driving out excesses inventories which he must purchase, store and be responsible for. The impact of supply chain management to the supplier may be more difficult to classify, initially, as benefits. They may vary, but may include-Fewer orders initially while the customer draws down excess inventories. Small and more frequent orders. Vendor carries inventory, not the customer. Higher warehousing costs for picking smaller and more orders. Higher freight costs for shipping smaller order and more orders. Penalties for not meeting the customer's requirements. Possible loss of business for not meeting the customer's requirements. Additional capital expenditure to satisfy the need for information and technology to provide the base for SCM responsiveness. Supply chain management success dictates new ways of doing business for suppliers. There is no "standard" practice;

Impediments/Challenges Accounting Silos. Functional Silos Reactionary Practices. Tactical versus Strategic Role for Logistics. Unclear Mission.

The Bullwhip Effect in Supply Chains

By Hau L. Lee, V. Padmanabhan and Seungjin Whang April 15, 1997 Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, and missed production schedules. How do exaggerated order swings occur? What can companies do to mitigate them?


Not long ago, logistics executives at Procter & Gamble (P&G) examined the order patterns for one of their best-selling products, Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors orders, the executives were surprised by the degree of variability. When they looked at P&Gs orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the bullwhip effect. (In some industries, it is known as the whiplash or the whipsaw effect.) When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders from the printer division to the companys integrated circuit division had even greater fluctuations.

Causes of Bullwhip Effect

Sources of variability can be demand variability, quality problems, strikes, plant fires, etc. Variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect. The following all can contribute to the bullwhip effect: Overreaction to backlogs Neglecting to order in an attempt to reduce inventory No communication up and down the supply chain No coordination up and down the supply chain Delay times for information and material flow Order batching - larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of transportation economics such as full truck load economies, and to benefit from sales incentives. Promotions often result in forward buying to benefit more from the lower prices. Shortage gaming: customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient. Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand. Free return policies

Countermeasures to the Bullwhip Effect

While the bullwhip effect is a common problem, many leading companies have been able to apply countermeasures to overcome it. Here are some of these solutions: Countermeasures to order batching - High order cost is countered with Electronic Data Interchange (EDI) and computer aided ordering (CAO). Countermeasures to shortage gaming - Proportional rationing schemes are countered by allocating units based on past sales.. Countermeasures to fluctuating prices - High-low pricing can be replaced with every day low prices (EDLP). Countermeasures to demand forecast inaccuracies - Lack of demand visibility can be addressed by providing access to point of sale (POS) data. Single control of replenishment or Vendor Managed Inventory (VMI) can overcome exaggerated demand forecasts. Long lead times should be reduced where economically advantageous. Free return policies are not addressed easily. Often, such policies simply must be prohibited or limited.

Main Scope of supply chain and logistics modelling

No model can capture all aspects of supply chain process or reality. To compromise, the guideline will based on the three levels of decision hierarchy Competitive strategy Tactical plans Operational routines

Another guideline: Based of the three structures of a supply chain network The type of a supply chain partnership The structural dimensions of a supply chain network The characteristics of process links among supply chain partners

Key components of models

Supply chain drivers Supply chain constraints Supply chain decision variables

Supply chain drivers

(1) Customer service initiatives Based on service elements like: Product availability Response time (2) Monetary value Based on: asset utilization Return on investment (ROI) Cost behaviour

Supply chain drivers (cont)

(3) Information/knowledge transaction Ability to transfer real time information like: Real time communication Technology transfer (4) Risk elements Based on mitigation of risks: Risk of quality failure Risk of information failure

Supply chain constraints

Constraints that represent the restriction on a range of decision alternatives Capacity Service compliance The extent of demand

Supply chain decision variables

Decision variables generally sets the limits of the decision outcomes and functionally related to performance measures Location Allocation Network structuring Number of facilities and equipments Number of stages (echelons) Service sequence Volume Inventory level Size of workforce The extent of outsourcing

Taxonomy of supply chain/logistic models