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It is a set of interacting elements, variables, parts or objects that are functionally related to one another that form a coherent group. Suppliers Distribution channel Manufacturers Customers

Cost Perspective
Cost perspective emphasize on measuring efficiency of any system by cost. Any individual part of a system operating at lower cost may not contribute to the whole systems efficiency . Eg: Rail transportation


Level Of Optimality

A firm should not optimize one activity at the expense of other activity. The overall firm is a system that should be optimized.


Vendo rs Soci al Marke ting Finance Logistics Other functions Produc tion

Custo mers Politi cal


Techniques of Logistics System Analysis


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Short Run/Static Analysis

Short run situation is considered. Costs associated with various interrelated logistic activities are considered such as transportation, warehousing, inventory, materials handling & industrial packaging. Static since it analyses costs at one point in time or at one output level.


Current system: A firm using all rail routes from plant & associated plant warehouse to the customers. New proposed system: A firm is using market oriented warehouse. The goods would be shipped by a barge.


Plant Logistics Costs Packaging Storage & Handling Inventory Carrying Administrative Fixed Cost Transportation Costs To Market Warehouse To Customer Warehouse Costs

Current System 500 150 50 75 4200

Proposed System 0 50 25 25 2400

0 800

150 100


The second way to project the optimum system is to mathematically calculate the point of equality between the systems. In example 1, system 1 and system 2 are equal at about 70,500 pounds of output. If we use a graph to determine the equally point, the accuracy is difficult. For a mathematical solution, we simply need to start with the equation for a straight line (y = a + bx). In this particular case, a would be the fixed costs and b would be the variable cost per unit. The x would be the output level. If we want to solve for the point at which the two systems are equal, we 6/4/12 can set the two equations up as equal and plug in the

As is demonstrated below, at approximately 70,500 pounds the two systems are equal, and we see a point of indifference between the two systems.

System 1 Total cost = fixed cost + variable cost/unit * number of units y = 4,200 + 0.0315x System 2

A particular company may consider more than two logistics systems at one time. Many examples show a company considering three or sometimes four systems. One can use the same basic methodology for plotting and mathematically solving for the points of indifference regardless of how many systems we analyse. 6/4/12

Further, in a particular situation involving two systems, the cost functions may not necessarily intersect. Hence, one function will be lower than the other over the entire output range. When a company considers three or more systems, two of them may intersect while the other occurs at a higher level in the quadrant. If we have three intersecting systems, two relevant intersection points or two relevant points of 6/4/12 indifference

Reasons for Selecting Proposed System

Better customer service- hence increased sales & profit. Long run perspective- at higher output proposed system is less expensive, a company experiencing a rapid sales growth.


Factors affecting cost and role of logistics

Companies require efficient logistic management to optimize their collective performance. Logistics management has been as a key business competency.


The three relationships which affects cost & role of logistics.


Competitive relationships of logistics Product relationships of logistics Spatial relationships of logistics




Competitive relationships of logistics

Order cycle Substitutability Inventory effect Transportation effect


Product relationships of logistics

Density Susceptibility to damage Need for special handling


Spatial relationships of logistics

The location of manufacturing, service and warehousing facilities in supply chain strongly impacts the total supply chain cost. Spatial relationships also increases order processing cost.



Transportation air, water, land Warehousing Inventory Management Packing and Utilization Information and communication


Importance of Logistics Management

Transportation costs Large retailers, low distribution costs eg. Metro Cash and Carry Deregulation e.g. Fiat Tata Changing strategies eg Toyota Way Technology eg. Wal-Mart, DELL Globalization

0% fuel 0% investment 0% dispute 99.9999 % performance 100% customer satisfaction