Chapter 2

ROLE OF LOGISTICS
IN SUPPLY CHAINS
 Learning Objectives
After reading this chapter, you should be able to do the following:

1. Understand the role and importance of

logistics in private and public
organizations.
2. Discuss the impact of logistics on the
economy and how effective logistics
management contributes to the vitality of
the economy.
3. Understand the value-added roles of
logistics on both a macro and micro level.
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 Learning Objectives, continued

4. Explain the relationships between

logistics and other functional areas such
as manufacturing, marketing, and
finance.
5. Discuss the importance of management
activities in the logistics function.
6. Analyze logistics systems from several
different perspectives to meet different
objectives.
7. Determine the total costs and understand
the cost tradeoffs in a logistics system.
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 Figure 2.1
Contemporary Supply Chain Profile

Source: Center for Supply Chain Research, Penn State University.

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 What is Logistics (four views of it as an
organizations division)
Business logistics:
That part of the supply chain process that plans,
implements, and controls the efficient, effective flow
and storage of goods, service, and related information
from point of use or consumption in order to meet
customer requirements.

Military logistics:
The design and integration of all aspects of support
for the operational capability of the military forces
(deployed or in garrison) and their equipment to
ensure readiness, reliability, and efficiency.

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 What is Logistics, continued

Event logistics:
The network of activities, facilities, and personnel
required to organize, schedule, and deploy the
resources for an event to take place and to efficiently
withdraw after the event.

Service logistics:
The acquisition, scheduling, and management of the
facilities/assets, personnel, and materials to support
and sustain a service operation or business.

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 Table 2.1
Logistics Definitions
Perspective Definition

Source: Adapted from Stephen H. Russell, A General Theory of Logistics Practices,

Air Force Journal of Logistics 24, no 4 (2000): 15
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 Logistics Generic Definition

A SCM component that plans, implements,

and executes flow and storage of goods,
service and information from the point of
origin to the point of consumption.

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 Figure 2.2
Utility Creation in the Economy

Source: Center for Supply Chain Research, Penn State University

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 Economic utilities and means that add value to a
product or service in the SCM

Production
Form Utility (by assembling parts into finished goods)
Logistics
Place Utility (by moving goods to where demand is)
Time Utility (by moving goods when demand exists)
Quantity Utility (by offering the right quantity)
Marketing
Possession Utility (by promotion and sale to increase
the desire to posses the goods)

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 Logistics Activities
1. Transportation
2. Warehousing and storage
3. Industrial packaging (during the
transportation and storage phase)
4. Materials handling
5. Inventory control
6. Order fulfillment

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 Logistics Activities, continued

7. Demand forecasting
8. Production planning/scheduling
9. Procurement (viewed as part of the
logistics process)
10.Customer service (order taking and
filling)
11.Facility location (selecting a plant or
DC location to supply)

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 Logistics cost as a % of GDP
1. 1970s 20%
2. 1980s 12%
3. 1990s 8.6%
4. 2000s 9.4%
5. 2010 - 8.3%

Note: the decline started in early1980, due

to transportation deregulation.
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 Figure 2.3
Logistics Cost as a Percentage of GDP

Source: Council of Supply Chain Management Professionals

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 Macro inventory as a % of GDP

The amount of inventory do organizations

carry to support GDP.
It is a measure of operations efficiency.
GDP went up by 212% from 1985 to 2006,
while the inventory value went up by
119%, indicating companies were
improving in managing their inventory

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 Figure 2.5
Macro Inventory as a Percentage of GDP

Source: Council of Supply Chain Management Professionals

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 Figure 2.4
Total Logistics Costs 2011 ($billion)
Interest 4
Taxes, obsolescence, depreciation, 280
insurance
Warehousing 112
Subtotal 336
Transportation Costs
M otor Carriers
TruckIntercity 403
TruckLocal 189
Subtotal 592
Other Carriers
Railroads 60
Water (international 32, dom estic 8) 33
Oil pipelines 10
Air (international 15, dom estic 23) 33
Forwarders 32
Subtotal 168
Shipperrelated costs 9
Logistics adm inistration 47
Total logistics cost 1211

Source: 22nd Annual State of Logistics Report, http://www.cscmp.org (2011) reproduced with permission
from Council of Supply Chain Management Professionals
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 Logistics in the Firm: The Micro
Dimension
Logistics interfaces with manufacturing or
operations
Demand fluctuation
Setup (changeover)
Inbound and outbound
Loading and packaging
Logistics Interfaces with marketing
Price (quantity discounts)
Product (physical attributes)
Promotion (to promote sales)
Place (to select different channels)
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 Logistics in the Firm: Factors Affecting
the Cost and Importance of Logistics
Competitive relationships
Order cycle
Sustainability
Inventory effect
Transportation effect
Product relationships
Dollar value
Density
Special handling & susceptibility to damage
Spatial relationships
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 Figure 2.6
Required Inventory and Order Cycle

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.7
Lost Sales Cost to Inventory Cost

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.8
Lost Sales Cost to Transportation Cost

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.9
Product Dollar Value to Logistics Costs

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.10
Product Weight Density to Logistics Costs

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.11
Susceptibility to Loss & Damage to Costs

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.12
Logistics and Spatial Relations (Plant selection)

Source: Center for Supply Chain Research, Penn State University

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 Table 2.3
Logistics Mode Cost Comparison (transportation mode selection)

COST CENTER RAIL MOTOR

Transportation 3 4.3
Inventory 5 3.75
Packaging 3.5 3.2
Warehousing 1.5 0.75
Cost of Lost Sales 2 1
Total Cost (per unit) 15 13

Source: Center for Supply Chain Research, Penn State University

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 Approaches to Analyzing Logistics
Systems
Materials management versus physical
distribution
Cost centers
Nodes versus links
Nodes are fixed spatial points where goods stop for
storage or processing.
Links represent the transportation network and
connect the nodes in the logistics system.
Logistics Channels

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 Figure 2.13
Dynamic (Cost) Analysis

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.14
Nodes and Links in a Logistics System

Source: Center for Supply Chain Research, Penn State University

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part.
 Figure 2.15
Simple Logistics Channel

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.16
Multi-Echelon Logistics Channel

Source: Center for Supply Chain Research, Penn State University

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 Figure 2.17
Complex Logistics Channel

Source: Center for Supply Chain Research, Penn State University

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 Summary
1. Logistics has developed as an important area or
function of business since World War II. It has gone
through several phases of development in achieving its
present status.
2. Logistics is a critical part of supply chain management.
The coordination and, perhaps, integration of the
logistics systems of all the organizations in a supply
chain are necessary requirements for successful
management of the supply chain.
3. Logistics has a number of different definitions because
of the broad-based interest in its activities and the
recognition of its importance. The definition developed
by the Council of Supply Chain Management
Professionals is the primary definition used in this text. 34
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 Summary, continued

4. Logistics is an area of management that has four sub-disciplines:

business, military, service, and event.
5. On a macro basis, logistics-related costs have been decreasing on
a relative basis, which has helped the U.S. economy regain its
competitive position on a global basis.
6. Logistics adds place, time, and quantity utilities to products and
enhances the form and possession utilities added by manufacturing
and marketing.
7. Logistics has an important relationship to manufacturing,
marketing, finance, and other areas of the organization.
8. Logistics managers are responsible for a number of important
activities, including transportation, inventory, warehousing,
materials handling, industrial packaging, customer service,
forecasting, and others.

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 Summary, continued

9. Logistics systems can be viewed or approached in

several different ways for analysis purposes, including
materials management versus physical distribution, cost
centers, nodes versus links, and channels. All four
approaches are viable for different purposes.
10. Logistics systems are frequently analyzed from a
systems approach, which emphasizes total cost and
tradeoffs when changes are proposed. Either a short- or
a long run perspective can be used.
11. The cost of logistics systems can be affected by a
number of major factors, including competition in the
market, the spatial relationship of nodes, and product
characteristics.

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