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BRIEF CONTENTS Preface xv
PART 1 Overview of Logistics 1 Chapter 1 An Overview of Logistics 2 Chapter 2 Logistics and Information Technology 22 Chapter 3 Strategic and Financial Logistics 41 Chapter 4 Organizational and Managerial Issues in Logistics 54
PART 2 Supply Chain Management 77 Chapter 5 The Supply Chain Management Concept 78 Chapter 6 Procurement 96
PART 3 Elements of Logistics Systems 111 Chapter 7 Demand Management, Order Management,
and Customer Service 112 Chapter 8 Inventory Management 130 Chapter 9 Facility Location 149 Chapter 10 Warehousing Management 168 Chapter 11 Packaging and Materials Handling 185 Chapter 12 Transportation 204 Chapter 13 Transportation Management 224 Chapter 14 International Logistics 243 Glossary 272 Name Index 281 Subject Index 285
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CONTENTS
Preface xv
Part I Overview of Logistics 1
Chapter 1 AN OVERVIEW OF LOGISTICS 2 Economic Impacts of Logistics 2
Logistics: What It Is 3
The Increased Importance of Logistics 5
A Reduction in Economic Regulation 5
Changes in Consumer Behavior 6
Technological Advances 7
Advances in Retailing 8
Globalization of Trade 8
The Systems and Total Cost Approaches to Logistics 8
Logistical Relationships within the Firm 10
Finance 10
Production 11
Marketing 11
Marketing Channels 13
Activities in the Logistical Channel 15
Customer Service 16
Demand Forecasting 16
Facility Location Decisions 16
International Logistics 16
Inventory Management 16
Materials Handling 16
Order Management 16
Packaging 16
Procurement 17
Reverse Logistics 17
Transportation Management 17
Warehousing Management 17
Logistics And Supply Chain Careers 17 Summary 19 • Key Terms 18 • Questions for Discussion and Review 19 • Suggested Readings 19
▶ CASE 1.1 KiddieLand and the Super Gym 20
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viii Contents
Chapter 2 LOGISTICS AND INFORMATION TECHNOLOGY 22 General Types of Information Management Systems 23
Office Automation Systems 24
Communication Systems 25
Transaction Processing Systems (TPS) 26
Management Information Systems (MIS) and Executive Information Systems(EIS) 28
Decision Support Systems (DSS) 29
Enterprise Systems 31
The Internet’s Influence on Logistics 32
Online Retailing 32
Cloud Computing 34
Electronic Procurement 34
Internet of Things 35
Information Technology Challenges 36 Summary 37 • Key Terms 37 • Questions for Discussion and Review 37 • Suggested Readings 37
▶ CASE 2.1 To Invest or not to Invest? that is the question 38
Chapter 3 STRATEGIC AND FINANCIAL LOGISTICS 41 Connecting Strategy to Financial Performance 42
Basic Financial Terminology 44
Income Statement 44
Balance Sheet 45
Statement of Cash Flows 46
Reporting Requirements 46
Strategic Profit Model 47
Logistics Connections to Net Profit Margin 49
Logistics Connections to Asset Turnover 49
Balanced Scorecard 49
Logistics Activity Measures 50
Transportation Measures 50
Warehousing Measures 51
Inventory Measures 51
Design and Implementation of Measures 51 Summary 52 • Key Terms 52 • Questions for Discussion and Review 52 • Suggested Readings 53
▶ CASE 3.1 Brant Freezer Company 53
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Contents ix
Chapter 4 ORGANIZATIONAL AND MANAGERIAL ISSUES IN LOGISTICS 56 Organizing Logistics within the Firm 56
Organizational Structure for Logistics 57
Organizational Design for Logistics 58
Managerial issues in Logistics 59
Productivity 60
Quality 62
Risk 64
Sustainability 69
Complexity 71 Summary 72 • Key Terms 72 • Questions for Discussion and Review 72 • Suggested Readings 73
▶ CASE 4.1 Red Spot Markets Company 73
Part II Supply Chain Management 77
Chapter5THESUPPLYCHAINMANAGEMENTCONCEPT 78 Evolution of Supply Chain Management 78
Supply Chain Management Process Frameworks 80
Enablers of SCM Implementation 81
Understanding the Implications of Increased Customer Power 82
Establishing Appropriate Relationship Structures 83
Leveraging Technology for Enhanced Visibility and Communication 85
Use of Supply Chain Facilitators 86
Barriers to SCM Implementation 88
Regulatory and Political Considerations 88
Lack of Top Management Commitment 88
Reluctance to Share, or Use, Relevant Information 88
Incompatible Information Systems 89
Incompatible Corporate Cultures 89
Globalization Challenges 90
Supply Chain Integration 90 Summary 91 • Key Terms 91 • Questions for Discussion and Review 92 • Suggested Readings 92
▶ CASE 5.1 Johnson Toy Company 93
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Chapter6PROCUREMENT 96 Procurement Objectives 97
Supplier Selection and Evaluation 98
Procurement Portfolio Approach 100
Supplier Development (Reverse Marketing) 101
Global Procurement (Sourcing) 101
Sustainable Procurement 103
Social Responsibility 103
Investment Recovery 104
Supply Chain Finance 105 Summary 105 • Key Terms 105 • Questions for Discussion and Review 106 • Suggested Readings 106
▶ CASE 6.1 Tempo Ltd. 107
Part III Elements of Logistics Systems 111
Chapter 7 DEMAND MANAGEMENT, ORDER MANAGEMENT, AND CUSTOMERSERVICE 112 Demand Management 112
Demand Forecasting Models 113
Demand Forecasting Issues 114
Order Management 114
Order Transmittal 115
Order Processing 115
Order Picking and Assembly 116
Order Delivery 118
Customer Service 119
Time 120
Dependability 120
Communication 120
Convenience 121
Managing Customer Service 121
Establishing Customer Service Objectives 121
Measuring Customer Service 123
Customer Profitability Analysis 124
Service Failure and Recovery 124 Summary 125 • Key Terms 125 • Questions for Discussion and Review 126 • Suggested Readings 126
▶ CASE 7.1 Handy Andy, Inc 127
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Chapter8 INVENTORYMANAGEMENT 130 Inventory Classifications 131
Inventory Costs 131
Inventory Carrying Costs 132
Ordering Costs 133
Trade-Off Between Carrying and Ordering Costs 133
Stockout Costs 134
Trade-Off Between Carrying and Stockout Costs 135
When to Order How Much to Order 136
Economic Order Quantity 137
Conditions of Uncertainty 139
Inventory Flows 139
Inventory Management: Special Concerns 140
ABC Analysis of Inventory 140
Dead Inventory 141
Inventory Turnover 142
Complementary and Substitute Products 142
Contemporary issues with Managing Inventory 143
Lean Manufacturing 143
Service Parts Logistics 145
Vendor-Managed Inventory 146 Summary 146 • Key Terms 146 • Questions for Discussion and Review 147 • Suggested Readings 147
▶ CASE 8.1 Low Nail Company 148
Chapter9FACILITYLOCATION 149 The Strategic Importance of Facility Location 150
Determining The Number of Facilities 151
General Factors Influencing Facility Location 152
Natural Resources 152
Population Characteristics—Market for Goods 154
Population Characteristics—Labor 154
Taxes and Incentives 156
Transportation Considerations 156
Proximity to Industry Clusters 158
Trade Patterns 158
Quality-of-Life Considerations 159
Locating in other Countries 159
Contents xi
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Specialized Location Characteristics 160
Free Trade Zones 160
Finding the Lowest-Cost Location using grid systems 161
Grid Systems 161
Facility Relocation and Facility Closing 163 Summary 164 • Key Terms 164 • Questions for Discussion and Review 164 • Suggested Readings 164
▶ CASE 9.1 All-Indian Logistics Services 166
Chapter10WAREHOUSINGMANAGEMENT 168 The Role of Warehousing in a Logistics System 168
Public, Private, Contract, and Multiclient Warehousing 170
Public Warehousing 170
Private Warehousing 172
Contract Warehousing 173
Multiclient Warehousing 173
Design Considerations in Warehousing 173
General Considerations 173
Trade-offs 174
Fixed versus Variable Slot Locations for Merchandise 174
Build Out (Horizontal) versus Build Up (Vertical) 175
Order-Picking versus Stock-Replenishing Functions 175
Two-Dock versus Single-Dock Layout 175
Conventional, Narrow, or Very Narrow Aisles 175
Degree of Warehouse Automation 176
Other Space Needs 176
Warehousing Operations 177
Warehousing Productivity Analysis 177
Safety Considerations 177
Hazardous Materials 180
Warehousing Security 180
Cleanliness and Sanitation Issues 181 Summary 182 • Key Terms 182 • Questions for Discussion and Review 182 • Suggested Readings 183
▶ CASE 10.1 Minnetonka Warehouse 183
Chapter11PACKAGINGANDMATERIALSHANDLING 185 Product Characteristics 185
Packaging Fundamentals 186
Functional Tradeoffs 187
Package Testing and Monitoring 188
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Labeling 188
Issues in Packaging 190
Environmental Protection 190
Metric System 192
Identifying Packaging Inefficiencies 192
Packaging’s Influence on Transportation Considerations 193
Unit Loads in Materials Handling 195
The Unit Load Platform 196
Beyond the Unit Load 197
Materials Handling 197
Materials Handling Principles 200
Materials Handling Equipment 200 Summary 201 • Key Terms 201 • Questions for Discussion and Review 202 • Suggested Readings 202
▶ CASE 11.1 Let There be Light Lamp Shade Company 203
Chapter12TRANSPORTATION 204 Comaparing and Contrasting Transportation Infrastructure 205
Transportation Modes 206
Airfreight 206
Motor Carriers 207
Pipelines 209
Railroads 210
Water 210
Intermodal Transportation 211
Transportation Specialists 213
Transportation Regulation 215
Environmental Regulation 215
Safety Regulation 216
Economic Regulation 216
Legal Classification of Carriers 217 Summary 219 • Key Terms 219 • Questions for Discussion and Review 219 • Suggested Readings 220
▶ CASE 12.1 HDT Truck Company 220
Chapter 13 TRANSPORTATION MANAGEMENT 224 Rate (Pricing) Considerations 225
Rate Determination 225
Rate and Service Negotiations 228
Modal and Carrier Selection 234
Documentation 235
Contents xiii
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Bill of Lading 235
Freight Bill 237
Freight Claims 237
Making and Receiving Shipments 238
Consolidating Small Shipments 238
Demurrage and Detention 240
Routing 240
Tracking and Expediting 241
Transportation Service Quality 241 Summary 242 • Key Terms 242 • Questions for Discussion and Review 243 • Suggested Readings 243
▶ CASE 13.1 Chippy Potato Chip Company 242
Chapter14 INTERNATIONALLOGISTICS 245 Macroenvironmental Influences on International Logistics 246
Political Factors 246
Economic Factors 248
Cultural Factors 249
International Documentation 251
Terms of Sale 251
Group 1: Terms that apply to any mode of transport 252
ExW (Exworks) 252
FCA (Free Carrier) 252
CPT (Carriage Paid To) 252
CIP (Carriage and Insurance Paid To) 252
DAT (Delivered at Terminal) 252
DAP (Delivered at Place) 253
DDP (Delivered duty Paid) 253
Group 2: Terms that Apply to Sea and Inland Waterway Transport Only 253
FAS (Free Alongside Ship) 253
FOB (Free on Board) 253
CFR (Cost and Freight) 253
CIF (Cost, Insurance, and Freight) 253
Methods of Payment 253
International Trade Specialists 255
International Freight Forwarders 255
Nonvessel-Operating Common Carriers 256
Export Management Companies 256
Export Packers 257
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xv
Transportation and Inventory Considerations in International Logistics 257
Ocean Shipping 258
Shipping Conferences and Alliances 259
International Airfreight 260
Surface Transport Considerations 260
International Trade Inventories 261
Logistics Performance Index 262 Summary 263 • Key Terms 263 • Questions for Discussion and Review 264 • Suggested Readings 264
▶ CASE 14.1 Nurnberg Augsburg Maschinenwerke (N.A.M) 265
Glossary 272 Name Index 281 Subject Index 285
Contents xv
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This edition of Contemporary Logistics reflects a business landscape that is characterized by-geopolitical tensions in various parts of the world, steadily increasing trade among countries and across continents, supply chain vulnerabilities caused by severe natural disasters, and an unabated pace of technological advancement. Although these and other events present both-challenges and opportunities for logis- tics managers, the logistics discipline still remains fun, exciting, and dynamic—characteristics that are reflected in our revision.
WHAT’S NEW IN THIS EDITION?
This edition reflects input from reviewers, adopters, and other interested parties in terms of structure, presentation, and content. Specific modifications include the following:
• This edition welcomes a new coauthor, A. Michael Knemeyer, currently Associate Professor of Logistics at the Fisher College of Business, The Ohio State University. Mike’s impressive blend of practical, academic, and consulting experience in logistics and supply chain management provides this edition with fresh insights and perspectives.
• This edition contains one new end-of-chapter case, Case 9-1 (“All-Indian Logistics Services”), and modifications of several other cases. For example, some case content, as well as several discussion questions, have been changed in Cases 7-1 (“Handy Andy, Inc.”), 11-1 (“Let There Be Light Lamp Shade Company”), and 14-1 (“Nürnberg Augsburg Maschinenwerke (N.A.M.)”).
• Each chapter in this edition has been revised and incorporates new examples and references. For example, Chapter 1’s discussion of the globalization of trade reports the average growth rate of world trade between 1991 and 2011 (as opposed to between 1997 and 2007 in the tenth edition). As another example, Chapter 14’s discussion of Incoterms reflects the revisions associated with Incoterms 2010, which were effective at the beginning of 2011.
• New content has been added throughout this edition. For example, Chapter 1 now includes a discussion of the rapidly emerging topic of humanitarian logistics. In addition, the “Logistics Activity Measures” section in Chapter 3 contains an expanded discussion of warehousing and inven- tory management performance measurements. Chapter 6 has added a subsection, “Procurement Portfolio Approach,” that highlights Kraljic’s Portfolio Matrix.
• Tables and figures containing country and industry data have been either revised or updated. Examples include Table 1-1, “The Cost of the Business Logistics System in Relation to a Country’s Gross Domestic Product”; Figure 10-3, “2012 Liberty Mutual Workplace Safety Index Findings”; and Table 12-1, “Infrastructure Statistics in Several Countries.”
• The list of Key Terms at the beginning of each chapter has been modified in the eleventh edition, and each key term is defined in the Glossary. New Key Terms in this edition include humanitarian logistics, big data, Logistics Uncertainty Pyramid Model, near-sourcing, and total cost of owner- ship, among others.
• The end-of-chapter Suggested Readings in the eleventh edition have been revised and over 60 percent of them have been published since 2009.
PREFACE
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xviii Preface
INSTRUCTOR SUPPLEMENTS
Supplements are available for adopting instructors to download at www.pearsonhighered.com Registration is simple and gives the instructor immediate access to new titles and new editions. Pearson’s dedicated technical support team is ready to help instructors with the media supplements that accompany this text. The instructor should visit support.pearson.com/getsupport for answers to frequently asked questions and for toll-free user support phone numbers. Supplements include the following:
• Instructor’s Manual • PowerPoint Slides
The current edition of Contemporary Logistics has been prepared by Paul Murphy and Mike Knemeyer, and they welcome your comments and suggestions at drmurphy@jcu.edu (Paul) and knemeyer.4@osu.edu (Mike). Paul and Mike gratefully acknowledge the important contributions that the late Donald F. Wood, James C. Johnson, and Daniel L. Wardlow made to earlier editions.
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1
P art 1 of Contemporary Logistics introduces the many dimensions of the complex and dynamic subject of logistics. Chapter 1 presents an overview of logistics and introduces you to what logistics is and why it is important. The chapter covers the economic impact of logistics and discusses how
logistics interacts with other functions, such as marketing, in an organization. Chapter 2 provides an overview of the general types of information management systems that are
applicable across each business function, and it provides examples of how these general types of information systems are specifically applied in logistics management. Chapter 2 also explores the Internet's influence on logistics and looks at some of the challenges associated with information technology.
Chapter 3 discusses the strategic financial outcomes influenced by logistics decisions. It uses the strategic profit model to highlight how logistics activities influence the key corporate financial measures of net income, capital employed, and return on capital employed.
Chapter 4 examines organizational and managerial issues in logistics. The chapter begins by looking at organizational structure and organizational design for logistics. Chapter 4 also discusses select managerial issues in logistics such as productivity, theft and pilferage, and the impact of terrorism on logistics systems.
OVERVIEW OF LOGISTICS PART I
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1
ECONOMIC IMPACTS OF LOGISTICS
Although the logistics discipline today is vastly different from what it was like when the first edition of this book was published in the 1970s, one thing that remains constant is the economic impact of logistics. Before defining what logistics is, we believe it is important to discuss the economic aspects of logistics; you might be surprised at its significant economic impact. From a macroeconomic per- spective, Table 1.1 presents logistics costs in relation to gross domestic product (GDP) for a select group of countries. Although absolute and relative logistics costs in relation to GDP vary from country to country, logistics is most definitely an important component in any country’s economy.
More specifically, logistics can play an important role in a nation’s economic growth and devel- opment. For example, relatively high logistics costs (as a percentage of GDP) in the People’s Republic of China (China) continue to restrict the country’s economic development; in particular, the high costs of highway transportation have severely constrained the growth of China’s e-commerce mar- ket.1 In a similar fashion, the growth of e-commerce sales in India is challenged by logistical ineffi- ciencies to include poor roads and inferior transportation equipment.2
Apart from the previous examples of macrolevel economic impacts, the economic impacts of logistics can affect individual consumers such as you. These impacts can be illustrated through the concept of economic utility, which is the value or usefulness of a product in fulfilling customer needs or wants. The four general types of economic utility are possession, form, time, and place; logistics clearly contributes to time and place utilities.
Possession utility refers to the value or usefulness that comes from a customer being able to take possession of a product. Possession utility can be influenced by the payment terms associ- ated with a product. Credit and debit cards, for example, facilitate possession utility by allowing the customer to purchase products without having to produce cash or a cash equivalent. Likewise,
1 Hua Wang, “High Logistics Cost, Toll Road and Institutional Factors Countermeasure in China,” Journal of Modern Accounting and Auditing, 7, no. 11 (2011): 1301–1306. 2 Sean McLain and Newley Purnell, “Indian Startups Vie to Win E-Commerce Battle,” The Wall Street Journal, October 25, 2015.
An Overview Of LOgistics
Learning Objectives
1.1 To discuss the economic impacts of logistics 1.2 To define what logistics is 1.3 To analyze the increased importance of logistics 1.4 To discuss the systems and total cost approaches to logistics 1.5 To expose you to logistical relationships within the firm 1.6 To introduce you to marketing channels 1.7 To provide a brief overview of activities in the logistics channel 1.8 To familiarize you with logistics careers
Learning Objective 1.1
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Chapter 1 • An Overview of Logistics 3
automotive leases allow customers to take possession of a more desirable model than would be pos- sible with conventional automotive loans.
Form utility refers to a product’s being in a form that (1) can be used by the customer and (2) is of value to the customer. Although form utility has generally been associated with production and manufacturing, logistics can also contribute to form utility. For example, to achieve production economies (i.e., lower cost per unit), a soft-drink company may produce thousands of cases of a certain type of soft drink (e.g., diet cola). You’re not likely to purchase diet cola by the thousands of cases (unless you’re having a really big social event!) but rather in smaller lot sizes, such as a six- or twelve-pack. Through allocation, logistics can break the thousands of cases of diet cola into the smaller quantities that are desired by customers.
Place utility refers to having products available where they are needed by customers; prod- ucts are moved from points of lesser value to points of greater value. Continuing with the diet cola example, place utility is increased by moving the soda from a point of lesser value (e.g., stored in a warehouse) to a point of greater value (e.g., on a supermarket shelf).
Closely related to place utility is time utility, which refers to having products available when they are needed by customers. It is important to recognize that different products have different sensitivities to time; three-day late delivery of perishable items likely has more serious consequences than three-day late delivery of nonperishable items.
Simultaneously achieving possession, form, place, and time utility goes a long way toward facilitating—but not guaranteeing—customer satisfaction. Consider the experience of a former stu- dent who placed an online order of Valentine’s Day flowers for his out-of-state girlfriend. The seller facilitated possession utility by allowing the student to pay by credit card, and a healthy arrangement of the correct bouquet (form utility) arrived at the girlfriend’s residence on Valentine’s Day (place and time utility). Although the seller provided possession, form, place, and timely utility, the buyer was quite unsatisfied with his purchase. The problem: The greeting card that accompanied the flow- ers had the wrong name for the girlfriend (but the right name for the boyfriend)!
LOGISTICS: WHAT IT IS
Now that you have been introduced to select economic impacts of logistics, it’s important to define what logistics is. This book adopts the definition promulgated by the Council of Supply Chain Management Professionals (CSCMP), one of the world’s most prominent organizations for logistics professionals. According to the CSCMP, “Logistics management is that part of supply chain manage- ment 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 consump- tion in order to meet customers’ requirements.”3
Learning Objective 1.2
3 www.cscmp.org/about-us/supply-chain-management-definitions
TABLE 1.1 The Cost of the Business Logistics System in Relation to a Country’s Gross Domestic Product
Country Logistics as a Percentage of GDP
United States 8.5
Brazil 12.0 South Africa 12.8 India 13.0 People’s Republic of China 18.0 Vietnam 25.0 Indonesia 27.0
Sources: Various country reports.
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4 Part I • Overview of Logistics
Let’s analyze this definition in closer detail. First, logistics is part of supply chain manage- ment. We’ll talk about supply chains and supply chain management in greater detail in Chapter 5, but the key point for now is that logistics is part of a bigger picture in the sense that supply chain management focuses on coordination among business functions (such as marketing, production, and finance) within and across organizations. The fact that logistics is explicitly recognized as part of supply chain management means that logistics can affect how well (or how poorly) an individual firm—and its associated supply chain(s)—can achieve goals and objectives.
The CSCMP definition also indicates that logistics “plans, implements, and controls.” Of par- ticular importance is the word and, which suggests that logistics should be involved in all three activi- ties—planning, implementing, controlling—and not just one or two. Note that the CSCMP defini- tion also refers to “efficient and effective forward and reverse flows and storage.” Broadly speaking, effectiveness can be thought of as, “How well does a company do what it says it’s going to do?” For example, if a company promises that all orders will be shipped within 24 hours of receipt, what percentage of orders are actually shipped within 24 hours of receipt? In contrast, efficiency can be thought of as how well (or poorly) company resources are used to achieve what a company promises it can do. For instance, some companies use premium or expedited transportation services—which cost more money—to cover for shortcomings in other parts of their logistics systems.
With respect to forward and reverse flows and storage, for many years logistics focused only on forward flows and storage, that is, those directed toward the point of consumption. Increasingly, however, the logistics discipline has recognized the importance of reverse flows and storage (reverse logistics), that is, those that originate at the point of consumption. Although the majority of the discus- sion in this book focuses on forward logistics, many companies today recognize the tactical and strategic implications of reverse logistics. Indeed, reverse logistics continues to grow in importance as individual companies, and select supply chains, recognize it as an opportunity for competitive advantage.4 One illustration of this is FedEx Corporation’s (a leading logistics service provider) 2015 acquisition of GENCO, a logistics service provider with long-standing expertise in reverse logistics.
The CSCMP definition also indicates that logistics involves the flow and storage of “goods, services, and related information.” Indeed, in the contemporary business environment, logistics is as much about the flow and storage of information as it is about the flow and storage of goods. The importance of information in contemporary logistics is captured by Fred Smith, CEO and chairman of FedEx, who believes that “information about the package is as important as the package itself.”5 Furthermore, an important contemporary logistics and supply chain axiom involves the ability to substitute information for inventory;6 for example, the cash register at many contemporary retailers also tracks what and when products are being purchased.
Finally, the CSCMP definition indicates that the purpose of logistics is “to meet customer requirements.” This is important for several reasons, with one being that logistics strategies and activities should be based on customer wants and needs, rather than the wants, needs, and capabili- ties of manufacturers or retailers. Contemporary information technology facilitates an understand- ing of customer wants and needs and this technology allows for real-time interactive communication with customers—a key to meeting customer requirements.
A second reason for the importance of meeting customer requirements is the notion that because different customers have different logistical needs and wants, a one-size-fits-all logistics approach (mass logistics)—in which every customer gets the same type and levels of logistics ser- vice—will result in some customers being overserved while others are underserved. Rather, compa- nies should consider tailored logistics approaches, in which groups of customers with similar logistical needs and wants are provided with logistics service appropriate to these needs and wants.7
4C. Clifford Defee, Terry Esper, and Diane Mollenkopf, “Leveraging Closed-Loop Orientation and Leadership for Environ- mental Sustainability,” Supply Chain Management: An International Journal, 14, no. 2 (2010): 87–98. 5Quote by Fred Smith, CEO and chairman of FedEx. 6David Ross, Distribution Planning and Control: Managing in an Era of Supply Chain Management, 3rd ed. (New York: Springer, 2015).
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Chapter 1 • An Overview of Logistics 5
For example, one particular retailer might require all its suppliers to route products through the retailer’s distribution centers while another retailer might require its suppliers to send products directly to the retailer’s stores.
The principles in this textbook are generally applicable not only to for-profit situations, but also to governmental and not-for-profit situations. From a governmental perspective, logistics is quite germane to the armed forces, which shouldn’t be surprising, given that logistics was first associ- ated with the military. Consider the potential consequences of a supply chain disruption. For exam- ple, in 2015 Russia officially closed the Northern Distribution Network—consisting of railway and road links—that provided a key logistics route into Afghanistan for countries that were fighting the Taliban insurgency.8
A community food bank provides one example of the relevance of logistics to not-for-profit situations. As an example, the Food Bank of New York City is responsible for delivering nearly 75 million pounds of food annually to more than 1,000 food assistance programs such as homeless shel- ters and food pantries. From a logistical perspective, the Food Bank of New York City is responsible for collecting, storing, repacking, and distributing food from its 90,000-square-foot warehouse.9
Furthermore, humanitarian logistics represents an emerging application of logistics to not- for-profit situations. Briefly, humanitarian logistics can be defined as the process and systems involved in mobilizing people, resources, skills, and knowledge to help people who have been affected by either a natural or man-made disaster.10 For example, natural disasters such as a catastrophic earthquake require food and medical supplies to be located, collected, transported, and distributed— and sooner, rather than later. Because of the increasing frequency (and severity) of disasters over the past 50 years, humanitarian logistics is likely to be an important topic into the foreseeable future.
THE INCREASED IMPORTANCE OF LOGISTICS
The formal study of business logistics, and predecessor concepts such as traffic management and physical distribution, has existed since the second half of the twentieth century. Quite frankly, from approximately 1950 to 1980, limited appreciation was shown for the importance of the logistics disci- pline. Since 1980, however, increasing recognition has been given to business logistics, in part because of tremendous—and rapid—changes in the discipline. Several key reasons for this are discussed next.
A Reduction in Economic Regulation
During the 1970s and 1980s, widespread reductions in economic regulation (commonly referred to as deregulation) relaxed government control of carriers’ rates and fares, entry and exit, mergers and acquisitions, and more. These controls were particularly onerous in the U.S. transportation industry in the sense that price competition was essentially nonexistent, and customers were pretty much forced to accept whatever service the carriers chose to provide. This meant that logistics managers had relatively little control over one of the most important cost components in a logistics system.
Reductions in economic regulation in the U.S. airfreight, railroad, and trucking industries allowed individual carriers flexibility in pricing and service. This flexibility was important to logistics for several reasons. First, it provided companies with the ability to implement the tailored logistics approach discussed earlier, in the sense that companies could specify different logistics service levels, and prices could be adjusted accordingly. Second, the increased pricing flexibility allowed large buy- ers of transportation services to reduce their transportation costs by leveraging large amounts of freight with a limited number of carriers.
7Joseph B. Fuller, James O’Conor, and Richard Rawlinson, “Tailored Logistics: The Next Advantage,” Harvard Business Review 71, no. 3 (1993): 87–98. 8http://www.silkroadreporters.com/2015/06/19/central-asia-will-miss-the-northern-distribution-network 9www.foodbanknyc.org 10Luk N. Van Wassenhove, “Humanitarian Aid Logistics: Supply Chain Management in High Gear,” Journal of the Operational Research Society, 57 (2006): 475–489.
Learning Objective 1.3
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6 Part I • Overview of Logistics
Although the preceding discussion has focused on lessened economic regulation in the United States, it appears that deregulation has had similar effects in other countries. For example, lessened eco- nomic regulation of transportation among European countries has resulted in lower prices for truck shipments in these countries.11 Likewise, privatization of commercial airports has been found to improve their operational efficiency relative to government-owned and/or government-operated airports.12
Changes in Consumer Behavior
A common business adage suggests that “change is the only constant.” Although changes in con- sumer behavior are commonly the purview of the psychology and marketing disciplines, such chang- es have important logistical implications as well. Several examples of changes in consumer behavior (customized customer, changing family roles, and rising customer expectations) and their possible logistical implications are discussed next.
The customized customer signifies that the customer desires a product offering that is highly tai- lored to the customer’s exact preferences. One approach for addressing the customized customer is through mass customization, which refers to the ability of a company to deliver highly customized products and services that are designed to meet the needs and wants of individual segments or cus- tomers. Going forward, mass customization is likely to be facilitated by advances in 3D printing (additive manufacturing), a process of making three-dimensional solid objects from a digitized file.13
Furthermore, the customized customer will not accept a “one size fits all” approach, and this means that logistics systems must be flexible rather than rigid. As an example, logistics service pro- viders such as FedEx and UPS offer a variety of delivery options to prospective customers; custom- ers can choose same-day delivery, next-day delivery by noon, next-day delivery by the close of busi- ness, or second-day delivery by noon, among others. As a general rule, the earlier the delivery time, the more expensive the transportation cost.
In terms of changing family roles, in the United States approximately 60 percent of families with children report that both parents work. One consequence of these dual-income families has been an increasing emphasis on the convenience associated with a family’s grocery shopping experiences. This convenience is manifested in various ways to include extended store hours, home delivery of purchased items, and ready-to-eat/ready-to-cook foods, and each of these has logistics-related impli- cations. With extended store hours—some stores are now open 24 hours—retailers must address issues such as the optimal delivery times for replenishment trucks and when to replenish merchan- dise. For example, it wouldn’t be a good idea for a 24-hour grocery store to replenish the shelves when its stores are crowded with customers.
Although home delivery could be convenient for the purchaser, the time-sensitive nature of grocery products means that delivery should be made when the purchaser is at home. As such, scheduling home deliveries to coincide with the purchaser’s availability is paramount to avoiding dis- satisfied customers.14 Finally, the growth in ready-to-eat/ready-to-cook foods means that some food processors have added high-volume cooking systems at their production facilities. From a logistics perspective, food processors continue to experiment with packaging alternatives that will extend the shelf life of ready-to-cook foods. For example, innovative vacuum packaging technology now allows for shelf lives of up to 45 days for chilled (and not frozen) forms of microwavable foods.15
11Francine LaFontaine and Laura Malaguzzi Valeri, “The Deregulation of International Trucking in the European Union: Form and Effect,” Journal of Regional Economics, 35, no. 1 (2009): 19–44. 12Tae H. Oum, Jia Yan, and Chunyan Yu, “Ownership Forms Matter for Airport Efficiency: A Stochastic Frontier Investiga- tion of Worldwide Airports,” Journal of Urban Economics, 64, no. 2 (2008): 422–435. 13http://3dprinting.com/what-is-3d-printing 14Jane Hiback, “Alternative Retailing Strategies,” Natural Food Merchandiser, August 2011, 18–19. 15Joe Condon, “Packaging Technology Extends Chilled Shelf-Life out to 45 Days,” www.beefcentral.com/p/news/ article/3180, May 2013.
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Chapter 1 • An Overview of Logistics 7
As for rising customer expectations, it should come as no surprise that customer expectations tend to increase over time, which means that a satisfactory level of performance in the past might not be considered so today. An excellent example of rising customer expectations is provided by Toyota Motor Company’s North American Parts Operations. In an effort to retain customers and to reduce losing customers to other automotive repair facilities, Toyota now offers same-day delivery (rather than one-day delivery) of automotive parts to certain Toyota dealerships located in major metropoli- tan areas. This same-day delivery has been facilitated by a redesign of Toyota’s automotive parts dis- tribution network.16 In a similar vein, online retailer Amazon now provides same-day delivery in a number of U.S. cities, and some of these cities also offer one-hour delivery service.17
Technological Advances
Prior to the start of every academic year, Beloit College in Wisconsin releases its annual Mindset list that details the world view of incoming first-year college students.18 The class of 2019, which as- sumes a 1997 birthdate, is particularly noteworthy because it has never lived in a world without access to Google. Tremendous technological advances during the course of your lifetime—from desktop computers to tablets, from second-generation mobile phones to fourth-generation mobile phones— have profoundly influenced business management and, by extension, business logistics. The follow- ing paragraphs will discuss several examples of the logistical impacts of technological advances.
Technological advances have influenced channel design by allowing companies to offer an alternate distribution channel (or alternate distribution channels) to already existing channels. In some cases, this alternate channel is direct (i.e., no intermediaries between the producer and final customer) in nature because the final customer orders directly from the producer rather than through an intermediary. The removal of intermediaries between producer and consumer—called disintermediation—can clearly affect the design of logistics systems in the sense that there could be changes in both the number and location of fixed facilities such as warehouses and distribution centers. In addition, the logistical considerations of a retailer’s online store (e.g., orders from numer- ous customers; orders for small quantities) are quite different from that retailer’s bricks-and-mortar stores (e.g., orders from a defined customer base; orders in larger quantities).
Technological advances can also improve the productivity of the order picking process, which we’ll discuss in greater detail in Chapter 7. Order picking traditionally involved paper pick tickets that listed the particular item(s) and quantity to be picked—and not necessarily the item’s location in a facility. Locating the items to be picked could be quite time-consuming, and paper picking often resulted in picking errors in part because of illegible pick orders. Today, by contrast, order picking can utilize radio frequency (RF) devices, voice-directed picking, as well as robotic picking. Although these technological picking advances are more costly than paper picking, they can lead to substantial improvements in picking efficiency. For example, RF terminals can reduce pick errors by approxi- mately 60 percent compared to paper picking.19
Shipment tracking provides another example of how technological advances have impacted logistics management. When one of the authors worked for a U.S. trucking company in the early 1980s, shipment tracking was a time-consuming, labor-intensive process that sometimes did not yield a location for the shipment in question. If we fast-forward to today, global positioning systems can provide real-time location information about a shipment (sometimes to within 10 feet of its exact location) as well as information about the vehicle’s temperature, humidity, and vibrations. Such infor- mation can be especially important to pharmaceutical and health-care companies.20
16http://toyotadriverseat.com/pr/tds/same-day-parts-deliveries-help-230692.aspx 17http://techcrunch.com/2015/10/22/amazon-brings-its-one-hour-delivery-service-prime-now-to-the-san-francisco-bay-area/ 18http://www.beloit.edu/mindset/2019/ 19Kristi Montgomery, “Tips for Quicker Product Picking,” Multichannel Merchant, December/January 2012, 28–29. 20Ian Putzger, “Apps Mania,” CT&L, April 2012, 32–33.
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Advances in Retailing
Retailing in the second decade of the twenty-first century is noticeably different than at the beginning of the twenty-first century, and the differences exemplify the importance of effective and efficient logistics for retailing success. Consider for example, so-called big-box retailers—stores with large amounts of both floor space and products for sale—such as Walmart, Carrefour, and Dick’s Sporting Goods. Many big-box retailers explicitly recognize superior logistics as an essential component of their corporate strat- egies, and because of this, their logistical practices are often viewed as a barometer for emerging logistics trends. Big-box retailers have also been trendsetters with respect to environmental and social issues in logistics. For example, two of Best Buy’s sustainability goals for 2020 are to recycle one billion pounds of consumer goods and reduce its carbon footprint by 20 percent (relative to 2009 performance).21, 22
Omnichannel retailing is a strategy that focuses on providing customers a seamless shopping experience regardless of sales channel. Retailers enable their customers to transact within and across any contract channel (online, in-store, mobile app, etc.) to enhance information availability and customer experience. Omnichannel retailing takes a number of different forms and if you have ordered something online and picked it up at a bricks-and-mortar store, then you have engaged in omnichannel retailing. What you might not have thought about in this situation is that the inventory used to fill your online order depletes that store’s inventory, and thus inventory visibility and accurate demand forecasting become essential for successful omnichannel retailing.23
Globalization of Trade
Although countries have traded with each other for thousands of years, globalization’s impact is greater today than ever before. Consider that world trade has grown at an average annual rate of ap- proximately five percent since 1990, including the worldwide economic slowdown in 2008 and 2009.24 Looking forward, the annual growth in world trade between 2016 and 2020 is forecast to be between 3 and 4 percent.25 Many factors, such as rising standards of living and multicountry trade alliances, have contributed to the growth of global trade; logistics has played a key role, too. Indeed, the ship- ping container—a uniform sealed reusable metal box in which goods are shipped—is often champi- oned as an important catalyst for the growth in global trade. The shipping container allows many different products to be securely transported long distances via water transportation—important be- cause long-distance water transportation is much less expensive than long-distance air transportation.
We’ll look at international logistics in much greater detail in Chapter 14, but for now one should recognize that the international logistics created by global trade is much more challenging and costly than domestic logistics. With respect to challenges, the geographic distances between buyers and sellers are often greater (which may translate into longer transit times), and monitoring logistics processes is sometimes complicated by differences in business practices, culture, and language. As for costs, the greater geographic distances tend to result in higher transportation costs, and docu- mentation requirements can be quite costly as well.
THE SYSTEMS AND TOTAL COST APPROACHES TO LOGISTICS
Logistics is a classic example of the systems approach to business problems. From a companywide perspective, the systems approach indicates that a company’s objectives can be realized by recogniz- ing the mutual interdependence of the major functional areas of the firm, such as marketing, produc- tion, finance, and logistics. One implication of the systems approach is that the goals and objectives
21http://sustainability.bby.com/management-approach/product-stewardship 22http://searchcio.techtarget.com/definition/omnichannel 23http://multichannelmerchant.com/opsandfulfillment/warehouse/key-omnichannel-success-strong-logistics-strategy- 21022014/ 24https://www.wto.org/english/news_e/pres15_e/pr739_e.htm 25https://www.atkearney.com/documents/10192/5498252/Global+Economic+Outlook+2015-2020--Beyond+the+ New+Mediocre.pdf/5c5c8945-00cc-4a4f-a04f-adef094e90b8
Learning Objective 1.4
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https://www.atkearney.com/documents/10192/5498252/Global+Economic+Outlook+2015-2020--Beyond+the+New+Mediocre.pdf/5c5c8945-00cc-4a4f-a04f-adef094e90b8
http://multichannelmerchant.com/opsandfulfillment/warehouse/key-omnichannel-success-strong-logistics-strategy-21022014/
http://multichannelmerchant.com/opsandfulfillment/warehouse/key-omnichannel-success-strong-logistics-strategy-21022014/
http://searchcio.techtarget.com/definition/omnichannel
http://sustainability.bby.com/management-approach/product-stewardship
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Chapter 1 • An Overview of Logistics 9
of the major functional areas should be compatible with the company’s goals and objectives. This means that one logistics system does not fit all companies because goals and objectives vary from one firm to another. As such, the logistics system of an organization that emphasizes customer satisfaction is likely different from the logistics system of an organization that emphasizes cost minimization.
A second implication is that decisions made by one functional area should consider the poten- tial implications on other functional areas. For example, one consequence of pursuing the marketing concept, which focuses on satisfying customer needs and wants, is often a marked increase in the number of stock-keeping units (SKUs) or line items of inventory (each different type or pack- age size of a good is a different SKU) offered for sale by many companies. An increased number of SKUs provides customers with more choices, which customers often want.
Alternatively, from a logistics perspective, the proliferation of SKUs creates challenges such as more items to identify, more items to store, and more items to track, which increases the chances of mistakes—which customers don’t like. An example of misidentification involves a consumer prod- ucts company that mistakenly assigned the same product code to a three-pack, six-pack, and twelve-pack of a particular product it sold. Imagine the reaction of the customer who ordered a three-pack of the product, only to receive a six-pack or a twelve-pack of it!
Just as the major functional areas of a firm should recognize their interdependence, so too should the various activities that comprise the logistics function (what we’ll call intrafunctional logistics). The logistics manager should balance each logistics activity to ensure that none is stressed to the point where it becomes detrimental to others.
This can be illustrated by referring to Figure 1.1, which indicates that business logistics is made up of materials management (movement into and storage of materials in a firm) and physical
Figure 1.1 Control over the Flow of Inbound and Outbound Movements In this drawing, the circles represent buildings where inventories are stored, and the lines with arrows represent movement performed by carriers, a stop-and-start process. Current thought deals more with flows, possibly in different volumes and at different speeds, but without the inventory standing still. The supply chain extends to both the left and right of this diagram and includes the suppliers’ suppliers and the customers’ customers.
Factory Finished goods inventory
Distribution to warehouses and wholesalers
Retailers Initial processing or creation of subassemblies
Raw materials, parts, and components
C u s t o m e r s
Materials management Physical distribution
Business logistics
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10 Part I • Overview of Logistics
distribution (storage of finished product and movement to the customer). Intrafunctional logistics attempts to coordinate materials management and physical distribution in a cost-efficient manner that supports an organization’s customer service objectives.
Materials management and physical distribution can be coordinated in many ways. One way is by using the same truck to deliver materials and component parts and to pick up finished goods. Although this may appear to be little more than common sense—and the authors believe that common sense is one of the keys to being an effective logistics manager—consider the case of the company that used the same trucking company to deliver materials and parts to one of its production plants as well as to take finished products from the facility. Unfortunately, one truck would arrive early in the morning to deliver the materials and parts, and another truck would arrive in the late afternoon to pick up the finished products. How could this happen? It’s quite simple: The inbound logistics group and the outbound logistics group were unaware that they were using the same trucking company—the two groups never communicated even though they worked in the same building!
Logistics managers use the total cost approach to coordinate materials management and physical distribution in a cost-efficient manner. This approach is built on the premise that all relevant activities in moving and storing products should be considered as a whole (i.e., their total cost), not individually. Use of the total cost approach requires an understanding of cost trade-offs; in other words, changes to one logistics activity cause some costs to increase and others to decrease. Importantly, an understanding of logistical cost trade-offs recognizes that the costs of certain logis- tical activities generally move in opposite directions. As an example, a decrease in transportation costs is often associated with an increase in warehousing costs.
The key to the total cost approach is that all relevant logistical cost items are considered simul- taneously when making a decision. For example, expedited transportation, such as air freight, will increase a company’s transportation costs. At the same time, expedited transportation leads to a faster order cycle, which allows the receiving company to hold lower levels of inventory, thus reduc- ing both its inventory carrying costs and warehousing costs. The total cost approach evaluates if the decreased inventory and warehousing costs are greater than the increased costs of expedited transportation. If so, the company might consider using expedited transportation (assuming that customer satisfaction isn’t negatively impacted), because the total logistics costs (consisting, in this example, of transportation, inventory, and warehousing costs) are less than the total costs of the existing system.
When used in the logistics decision-making process, the total cost concept approach forms what is commonly called the total logistics concept. This concept is unique not because of the activities performed, but because of the integration of all activities into a unified whole that seeks to minimize distribution costs in a manner that supports an organization’s strategic objectives. The total logistics concept can be extended to include a firm’s suppliers and customers, such as in supply chain manage- ment, which will be covered in Chapter 5.
LOGISTICAL RELATIONSHIPS WITHIN THE FIRM
From a companywide perspective, the system and total cost approaches to logistics require an under- standing of logistics and its relationships with other functional areas. Because Chapter 6 is devoted specifically to procurement (purchasing), our discussion here focuses on logistical relationships with finance, production, and marketing.
Finance
The finance staff is often charged with the responsibility of allocating the firm’s funds to projects desired by the various operating departments. As such, the finance department is often instrumental in approving capital budgeting decisions that affect logistics, such as the acquisition of materials handling equipment (e.g., forklifts) and packaging equipment (e.g., a shrink-wrap machine). In such
Learning Objective 1.5
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Chapter 1 • An Overview of Logistics 11
situations, finance personnel may decide between purchasing or leasing the relevant equipment, assuming they have approved the decision to acquire it.
Inventory is another area where finance and logistics can interact. A basic challenge for the two areas is that the finance department often measures inventory in terms of its cost or value in dol- lars, whereas logistics tends to measure inventory in terms of units. The differing ways of measuring inventory can create potential friction between the two groups, as illustrated in the following exam- ple. From a cash flow perspective, the finance department might prefer to sell two boxes of hair dryers worth $1,000 dollars than to sell 15 boxes of hair shampoo worth $900. Alternatively, from a productivity perspective such as the number of boxes handled per worker, the logistics department might prefer selling the 15 boxes of hair shampoo rather than the two boxes of hair dryers.
In addition, in times of inflation, identical items added to inventory at different times means that each unit has a different cost, and even though inventory levels are not affected, it makes a dif- ference whether an organization uses historic cost or current value as an indicator of the inventory’s total value. Furthermore, certain items of inventory (for example, automobiles and produce, among others) lose value over time, and the authors have had consulting experiences with companies that showed a particular SKU to have a market value of $0—while the companies’ warehousing facilities contained several hundred units of physical inventory of the particular SKU.
Production
One of the most common interfaces between production and logistics involves the length of production runs. In many cases, the production people favor long production runs of individual products because this allows the relevant fixed costs to be spread over more units, thus resulting in a lower production cost per unit. Having said this, long production runs generate large amounts of inventory, and it is often the logistician’s responsibility to store and track the inventory. It’s generally much easier to store and track 5 unit of a product that to store and track 500 units of the product.
Another consideration with long production runs is that sometimes excess inventory for par- ticular products occurs because of limited (or no) demand for them. At a minimum, these products add to a company’s inventory carrying costs and also take up space that could be used to store other products. Slow-selling (or non-selling) products may also increase a company’s handling costs, as illustrated by a situation in which forklift drivers would periodically move 150 refrigerators from one warehouse area to another, just to ensure that the company’s managers would not see the refrigera- tors sitting in the same place for an extended period of time! You may find it difficult to believe that these 150 refrigerators were moved throughout the warehouse for nearly five years before managers were alerted to the behavior.
Increasing utilization of the postponement concept (the delay of value-added activities such as assembly, production, and packaging until the latest possible time)26 also influences the interface between production and logistics. More specifically, some value-added activities (e.g., case packing, case labeling) that were traditionally performed at a production plant are now performed in ware- housing facilities. As a result, warehousing facilities are adding new types of equipment and being configured differently to allow specific value-added activities to take place.
Marketing
Contemporary marketing places a heavy emphasis on customer satisfaction, and logistics strate- gies can facilitate customer satisfaction by reducing the cost of products, which can translate into lower prices as well as bringing a broader variety of choices closer to where the customer wishes to
26 Glossary, www.cscmp.org
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12 Part I • Overview of Logistics
buy or use the product. Logistics strategies offer a unique way for a company to differentiate itself among competitors, and logistics now offers an important route for many firms to create marketing superiority. The following discussion about the interactions between logistics and marketing focuses on the marketing mix, sometimes referred to as the four Ps of marketing (place, price, product, and promotion).
PLACE DECISIONS Decisions regarding place involve two types of networks, namely, logistics and the marketing channel (which is discussed in greater detail later in this chapter). Logistics decisions concern the most effective way to move and store the product from where it is produced to where it is sold. An effective logistics system can provide positive support by enabling the firm to attract and utilize what it considers to be the most productive channel and supply chain members. Channel members are frequently in a position to pick and choose which manufacturer’s products they wish to merchandise. If a manufacturer is not consistently able to provide a certain product at the right time, in the right quantities, and in an undamaged condition, the channel members may end their relation- ship with the supplier or cease active promotion of the supplier’s product.
From a marketing perspective, place decisions may also involve new strategies for reaching customers. A popular contemporary marketing strategy involves co-branding, which refers to an alliance that allows customers to purchase products from two or more name-brand retailers at one store location. Examples of co-branding include Starbucks coffee shops located within Marriott hotels, Subway restaurants located within some Walmart stores, and co-located Dunkin’ Donuts and Baskin-Robbins stores. From a marketing perspective, co-branding offers potential customers con- venience by allowing for one-stop shopping as well the opportunity to purchase brand-name, rather than private-label (proprietary), products.27 From a logistical perspective, one decision involves product delivery to the particular retail locations. Should, for example, each co-branding party deliver its respective products to a particular location, or should the co-branding parties co-load vehicles to minimize the number of deliveries that arrive at a particular location? While the former might result in higher delivery costs because of multiple deliveries, the latter requires a higher degree of coordi- nation between the co-branding parties.
PRICE DECISIONS A key price-related decision for marketers involves how a product’s transpor- tation costs should be reflected in its selling price, and this has proved to be a particularly vexing issue for some online merchants. For example, should a company’s selling price reflect its product’s landed cost, which refers to the price of a product at the source plus transportation costs to its destination? On the one hand, a selling price that is based on a product’s landed cost allows the seller to offer “free” delivery of the product to prospective customers, because the transportation costs associated with delivery are captured in the landed cost. On the other hand, a selling price that is based on a product’s landed cost could result in a substantial increase in a product’s selling price, and a higher selling price tends to decrease buyer demand for most products. One way that some online merchants address this conundrum is to require a minimum order amount (e.g., $50) to qualify for “free” delivery.
In addition to transportation considerations, logistics managers may play an important role in product pricing. They are expected to know the costs of providing various levels of customer service and therefore should be consulted to determine the trade-offs between costs and customer service. Because many distribution costs produce per unit savings when larger volumes are handled, the logistics manager can also help formulate the firm’s quantity discount pricing policies.
PRODuCT DECISIONS A number of potential interfaces are possible between marketing and logistics in terms of product decisions. For example, as noted earlier, the marked increase in product offerings—which allows for more customer choice—creates logistical challenges in terms of identi- fication, storage, and tracking.
27 Marilyn Odesser-Torpey, “Co-Branding: Positives and Pitfalls,” Convenience Store Decisions, April 2012, 46–48.
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Chapter 1 • An Overview of Logistics 13
Another product interface between marketing and logistics involves the amount of particular SKUs to hold. Marketers often prefer to carry higher quantities of particular items because this reduces the likelihood of stockouts (being out of an item at the same time there is demand for it). However, from a logistics perspective, higher quantities of inventory (1) necessitate additional stor- age space and (2) increase inventory carrying costs.
Product design, which is often the purview of marketers, can also have important implications for logistical effectiveness and efficiency. For example, long-necked glass beverage containers might be more distinctive than aluminum cans; however, from a logistics perspective, long-necked bottles take up more space and are more likely to be damaged than aluminum cans.
In addition, marketers’ growing emphasis on offering sustainable products—products that meet present needs without compromising the ability of future generations to meet their needs—can also impact logistical decisions. Consider, for example, fair trade products, those that guarantee a better deal for producers in the developing world through fair and stable prices as well as teaching farming methods that are environmentally sustainable.28 From a marketing perspective, customer demand for fair trade products, such as coffee or chocolate, has resulted in some companies establishing distinct fair trade brands.29 From a logistical perspective, an organization’s commitment to selling fair trade products, such as coffee or chocolate, may result in changed sourcing requirements for the necessary raw materials.
PROMOTION DECISIONS Many promotional decisions require close coordination between market- ing and logistics. One important situation concerns the availability of highly advertised products, par- ticularly when a company is running pricing campaigns that lower the price of certain items. Few things are more damaging to a firm’s goodwill than being stocked out of items that are heavily promoted in a sales campaign. In addition, in some instances, imbalances of product supply and demand can be viewed as bait-and-switch tactics—that is, enticing customers with the promises of a low-priced product, only to find that it is unavailable, but that a higher-priced substitute product is readily available.
Moreover, once a decision is made to promote the introduction of a new product, the logistics staff assumes responsibility for having the product in place on the scheduled release date—not earlier, not later. The complexity of so doing is well illustrated by looking at how Apple manages the release of new versions of the iPhone. Because the iPhone is manufactured in China, Apple pre-purchases space on airfreight carriers such as FedEx in order to move the devices to distribution centers in vari- ous parts of the world. In order to minimize opportunities for theft and other glitches, Apple security personnel will accompany the shipments from the factory floor to the different distribution centers.30
MARKETING CHANNELS
Another concept that is useful in studying the marketing relationships between and among firms is to look at marketing channels, which refer to “a set of institutions necessary to transfer the title to goods and to move goods from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process.”31 The principal traditional institutions in the marketing channel are the manufacturer, the wholesaler, and the retailer. These channel members work together in several different channel arrangements—own- ership channel, negotiation channel, financing channel, promotions channel, and logistics channel—and we’ll look more closely at how manufacturers, wholesalers, and retailers interact in these five channels.
The ownership channel covers movement of the title to the goods, and the goods themselves might not be physically present or even exist. If a good is in great demand, such as a commissioned piece of art or a scarce new consumer product, one might have to buy it before it is produced. Sometimes, a product
28 Derek Townsend, “Fair Trade Future?” Food Service, June 2008, 27. 29 No author, “More Chocolate Manufacturers Moving to Ethical Sourcing,” Candy Industry, April 2010, 10–12. 30 http://www.bloomberg.com/news/2013-09-11/the-iphone-s-secret-flights-from-china-to-your-local-apple-store.html
Learning Objective 1.6
31 American Marketing Association Dictionary, www.marketingpower.com
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14 Part I • Overview of Logistics
will not be made until there are sufficient financial commitments; this is often the case with new models of commercial airplanes. The party owning the good almost always has the right to trade or sell it and bears the risks and costs associated with having it in inventory. Also, while owning the good, one can use it as collateral for a loan, although this may place some restrictions on its use or movement.
The negotiations channel is the one in which buy and sell agreements are reached. This could include transactions face-to-face or by telephone, e-mail, electronic data interchange, or almost any other form of communication. In many situations, no actual negotiations take place; the price for the product is stated, and one either buys at that price or does not. In some trades, auctions are used; in others, highly structured, organized trading takes place, such as markets for some commodities. One part of the negotiations covers how activities in the other channels are to be handled. For example, each buying party will specify the point and time of delivery and the point and time of payment. Even packaging design may be negotiated. (An old Henry Ford story is that suppliers of some parts were directed to ship in wooden crates built of good lumber and to very exacting specifications. It turned out that the empty crates were then partially disassembled and became floorboards in Ford Model Ts.)
The financing channel handles payments for goods. More importantly, it handles the company’s credit. The multiple participants in the channel have different financial strengths, and often one must help another to keep the entire channel alive. For example, a newly opened retail store may have some of its goods placed on consignment, meaning that the wholesaler, not the store, owns them. The retailer will reimburse the wholesaler only for goods sold; the wholesaler bears nearly all the financial risks. Sometimes, in an effort to develop what it believes is a necessary new product line, a wholesaler will assist the manufacturer by putting up cash in advance along with an order. Alternatively, the wholesaler will place a large, guaranteed order, and the manufacturer can take that order to a bank and use it as a basis for receiving a loan.
Credit is important to all parties in the channel, who frequently receive or extend it, and credit becomes an integral part of the negotiations. If bills are not paid when due or if credit is over-extended, collection becomes a financing channel function. Indeed, a lingering aftereffect of the 2007–2009 economic recession is that some large companies are taking longer to pay their bills. More specifically, some larger companies now pay their bills within 90 days, as opposed to 30 to 60 days prior to the recession. While beneficial to the larger companies, these lengthened payment cycles negatively impact their suppliers.32
The promotions channel is concerned with promoting a new or an existing product, and it can be related to the financing channel because monetary allowances are often part of the promotion effort. In addition, the promotions channel and the logistics channel are linked in several ways. First, there may be special advertising materials, such as coupon books, floor advertising posters, or displays, which must be distributed with the promoted product. Second, some of the cartons or consumer packs may have special labeling, and their placement at retailers must coincide with other promo- tional efforts. Third, because logistics personnel handle order processing, they have instantaneous records of actual sales, which indicate the initial success of the promotional efforts.
As mentioned previously, the logistics channel, its components, and its functioning are the main topics of this book. The most significant contribution that the logistics channel makes to the overall channel process is the sorting function, which bridges “the discrepancy between the assort- ment of goods and services generated by the producer and the assortment demanded by the con- sumer.”33 The sorting function has four steps, which are important to understanding the concept of goods flowing through the logistics channel:
• Sorting out is sorting a heterogeneous supply of products into stocks that are homogeneous. • Accumulating is bringing together similar stocks from different sources. • Allocating is breaking a homogeneous supply into smaller lots. • Assorting is building up assortments of goods for resale, usually to retail customers.
32 Angus Loten, “Big Customers Are Taking Longer to Pay,” The Wall Street Journal, June 7, 2012, B7. 33 American Marketing Association Dictionary.
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These steps take place between the manufacturer and the consumer, which means that they are performed by the wholesaler, the retailer, or specialist intermediaries.
In addition to the major actors or primary participants in a logistics channel, many less-well- known actors, called facilitators or channel intermediaries, play minor but essential roles. Intermediaries make the entire system function better and should only be used when they add value to a transaction. They spring up and flourish in areas where communications and other interactions between major parties are not well meshed. In international transactions, for example, translators may be an important interme- diary. Intermediaries also function in areas needing orderly routines, such as order processing, and in searching, for example, when customers are looking for products or producers are looking for custom- ers. Intermediaries fill niches, they are very well focused, and they serve as buffers between various chan- nel members. Usually, they do not take an ownership position in the products or goods being handled.
The five channels discussed previously show where intermediaries function and fit. For exam- ple, in the ownership channel, a common intermediary is the bank or finance company, which may assume temporary or partial ownership of goods as part of an ongoing transaction. Often, this is a condition for the extension of credit. Banks routinely loan funds to all parties in a channel, making it possible for goods to be manufactured, marketed, and sold.
Brokers, who are associated with the negotiation channel, are independent contractors paid to arrange a particular transaction. A broker can be used by either a buyer or seller and is often used to arrange truck transportation for either the buyer (shipper/receiver) or seller (trucker). A broker can add value for a trucker in the sense that an individual trucker believes that his or her time is more profitably spent driving, rather than being on the phone or Internet trying to negotiate for the next load. In a similar fashion, a broker adds value for a shipper/receiver because of the broker’s knowl- edge of potential transportation options.
Banks and finance companies are prominent intermediaries in the financing channel, and both parties supply the credit necessary for a deal to be finalized. For big-ticket items, such as ships or ware- houses, the buyer almost always borrows money to finance part of the purchase. Sometimes insur- ance is also a requirement in the agreement, so insurance companies may also serve as intermediaries.
The promotions channel has intermediaries that aid with promotions, such as firms that design, build, and transport product exhibits for display at trade shows. Advertising agencies can handle the preparation and media placement of advertising materials, and firms often use public relations agencies to represent them to the news media. Some companies choose to outsource their personal selling functions by hiring an intermediary to provide them with a contract sales force. These promotion efforts handled by intermediaries must be coordinated with the firm’s overall mar- keting communication activities.
The logistics channel has many intermediaries, and many are mentioned in this book. A com- monly used intermediary is the freight forwarder, whose function is to assemble small shipments into larger shipments and then tender them in truckload or rail carload quantities to truck lines or to railroads. In international logistics, intermediaries abound, and more than a hundred different types could be listed. One example is cargo surveyors who specialize in coffee; these specialists examine and arbitrate damage claims involving shipments of coffee beans.
ACTIVITIES IN THE LOGISTICAL CHANNEL
To successfully apply the systems and total cost approaches to logistics, it is essential to understand the various logistics activities. Keep in mind that because one logistics system does not fit all compa- nies, the number of activities in a logistics system can vary from company to company. Activities that are considered to be logistics related include, but are not limited to, the following:
Customer service Demand forecasting
Facility location decisions International logistics
Inventory management Materials handling
Learning Objective 1.7
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16 Part I • Overview of Logistics
Order management Packaging
Procurement Reverse logistics
Transportation management Warehousing management
Customer Service
There are many definitions of customer service, such as “keeping existing customers happy.” Cus- tomer service involves making sure that the right person receives the right product at the right place at the right time in the right condition and at the right cost. Customer service is discussed in greater detail in Chapter 7.
Demand Forecasting
Demand forecasting refers to efforts to estimate product demand in a future time period. The grow- ing popularity of the supply chain concept has prompted increasing collaboration among supply chain partners with respect to demand forecasting. Such collaboration can enhance efficiency by reducing overall inventory levels in a supply chain. We discuss demand forecasting in Chapter 7.
Facility Location Decisions
It’s often said that the success of a retail store depends on three factors: location, location, and loca- tion. It can also be said that the success of a particular logistics system is dependent on the location of the relevant warehousing and production facilities. Facility location decisions are increasingly im- portant as the configuration of logistics systems is altered due to the impacts of multinational trade agreements. Facility location decisions are covered in Chapter 9.
International Logistics
International logistics, which refers to the logistics activities associated with goods that are sold across national boundaries, is much more costly and challenging than domestic logistics. We will take a closer look at international logistics in Chapter 14.
Inventory Management
Inventory refers to stocks of goods that are maintained for a variety of purposes, such as for resale to others, as well as to support manufacturing or assembling processes. When managing inventory, logisticians need to simultaneously consider three relevant costs—the cost of carrying (holding) product, the cost of ordering product, and the cost of being out of stock. Chapter 8 provides further discussion concerning inventory management.
Materials Handling
Materials handling refers to the short-distance movement of products within the confines of a facil- ity (e.g., plant, warehouse). Materials handling considerations are presented in Chapter 11.
Order Management
Order management refers to management of the activities that take place between the time a custom- er places an order and the time it is received by the customer. As such, order management is a logistics activity with a high degree of visibility to customers. Order management is discussed in Chapter 7.
Packaging
Packaging can have both a marketing (consumer packaging) and logistical (industrial packaging) di- mension. Industrial (protective) packaging refers to packaging that prepares a product for storage and
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Chapter 1 • An Overview of Logistics 17
transit (e.g., boxes, crates). Packaging has important interfaces with the materials handling and ware- housing activities. Chapter 11 discusses packaging in conjunction with materials handling.
Procurement
Procurement refers to the raw materials, component parts, and supplies bought from outside organi- zations to support a company’s operations.34 Procurement’s direct link to outside organizations means that its strategic importance has increased as supply chain management has become more popular. Procurement is discussed in more detail in Chapter 6.
Reverse Logistics
Products can be returned for various reasons, such as product recalls, product damage, lack of de- mand, and customer dissatisfaction. The challenges associated with reverse logistics can be com- plicated by the fact that returned products often move in small quantities and may move outside forward distribution channels. Reverse logistics is examined in Chapter 4.
Transportation Management
Transportation can be defined as the actual physical movement of goods or people from one place to another, whereas transportation management refers to the management of transportation activities by a particular organization. Transportation can account for up to 50 percent of a firm’s total logis- tics costs and thus represents the most costly logistics activity in many organizations. Transportation considerations are discussed in Chapter 12. Transportation management is discussed in Chapter 13.
Warehousing Management
Warehousing refers to places where inventory can be stored for a particular period of time. As noted previously, important changes have occurred with respect to warehousing’s role in contemporary logistics and supply chain systems. Warehousing is discussed in Chapter 10.
LOGISTICS AND SuPPLY CHAIN CAREERS
The job market for logisticians and supply chain managers continues to be strong at both the under- graduate and MBA levels. Entry-level jobs include logistics (supply chain) analyst, consultant, cus- tomer service manager, and fulfillment supervisor. Second-level positions include international logis- tics manager, supply chain software manager, purchasing manager, transportation manager, and warehouse operations manager.35 There are a variety of possible career paths available and, unlike when the first edition of this book was published, no glass ceiling exists for managers with expertise in logistics or supply chain management. Indeed, Tim Cook headed up Apple’s supply chain before becoming the company’s Chief Executive Officer.
Because of the growing importance of logistics and supply chain management, a number of professional organizations are dedicated to advancing the professional knowledge of their members. One rationale for these professional associations is that the state of the art is changing so rapidly that professionals must educate and re-educate themselves on a regular basis. Several prominent profes- sional logistics and supply chain management organizations are summarized in the appendix to this chapter.
34 Donald J. Bowersox, David J. Closs, and M. Bixby Cooper, Supply Chain Logistics Management (Boston: McGraw-Hill Publishing, 2002).
Learning Objective 1.8
35 www.cscmp.org
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18 Part I • Overview of Logistics
Summary
This chapter introduced the topic of logistics, which the CSCMP defines as “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.”
The economic impacts of logistics were discussed along with reasons for the increased importance of logistics
in recent years. Systems and total cost approaches to logistics were discussed, as were logistical relationships within a firm, with a particular focus on various interfaces between market- ing and logistics. A short description of a number of logistics activities was presented. The chapter concluded with a brief look at logistics careers.
Key Terms
3D printing Big-box retailer Co-branding Container Cost trade-offs Disintermediation Economic utility Form utility Humanitarian logistics
Landed cost Logistics Marketing channels Mass logistics Materials management Omnichannel retailing Physical distribution Place utility Possession utility
Postponement Sorting function Stock-keeping units (SKUs) Stockouts Sustainable products Systems approach Tailored logistics Time utility Total cost approach
Questions for Discussion and Review
1.1 Did it surprise you that logistics has such an important economic impact? Why or why not?
1.2 Distinguish between possession, form, time, and place utility.
1.3 How does logistics contribute to time and place utility? 1.4 How can a particular logistics system be effective but not
efficient? 1.5 Explain the significance of the fact that the purpose of
logistics is to meet customer requirements. 1.6 Explain how an understanding of logistics management
could be relevant to your favorite charitable organization. 1.7 How has a reduction in economic regulation contributed
to the increased importance of logistics? 1.8 Discuss the logistical implications associated with the
increased emphasis on the convenience associated with a family’s shopping experience.
1.9 What are some ways in which technology has impacted logistics management?
1.10 Explain how big-box retailers are logistical trendsetters.
1.11 What is the systems approach to problem solving? How is this concept applicable to logistics management?
1.12 Distinguish between materials management and physical distribution.
1.13 Explain what is meant by the total cost approach to logistics. 1.14 Define what is meant by a cost trade-off. Do you believe
that this concept is workable? Why or why not? 1.15 What are several areas in which finance and logistics might
interface? 1.16 Discuss the postponement concept as it relates to the
production and logistics interface. 1.17 Define what is meant by a landed cost and explain its
relevance for pricing decisions. 1.18 Discuss several possible interfaces between marketing and
logistics in terms of product decisions. 1.19 Briefly discuss the ownership, negotiations, financing,
promotions, and logistics channels. 1.20 Discuss five activities that might be part of a company’s
logistics department.
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Chapter 1 • An Overview of Logistics 19
Suggested Readings
Day, Jamison M., Steven A. Melnyk, Paul D. Larson, Edward W. Davis, and D. Clay Whybark. “Humanitarian and Disaster Relief Supply Chains: A Matter of Life and Death.” Journal of Supply Chain Man- agement 48, no. 2 (2012): 21–36.
Fawcett, Stanley E. and Matthew A. Waller. “Designing the Supply Chain for Success at the Bottom of the Pyramid.” Journal of Busi- ness Logistics 36, no. 3 (2015): 233–239.
Lin, Yong, Saara Pekkarinan, and Shihua Ma. “Service-Dominant Logic for Managing the Logistics-Manufacturing Interface: A Case Study.” International Journal of Logistics Management 26, no. 3 (2015): 195–214.
Lutz, Heather and Laura Birou. “Logistics Education: A Look at the Current State of the Art and Science.” Supply Chain Management: An International Journal 18, no. 4 (2013): 455–467.
McGinnis, Michael A., Jonathan W. Kohn, and John E. Spillan. “A Longitudinal Study of Logistics Strategy: 1990–2008.” Journal of Business Logistics 31, no. 1 (2010): 217–235.
Perego, Alessandro, Sara Perotti, and Ricardo Mangiarcina. “ICT for Logistics and Freight Transportation: A Literature Review and Research Agenda.” International Journal of Physical Distribution & Logistics Management 41, no. 5 (2011): 457–483.
Ravi, V. and Ravi Shankar. “Survey of Reverse Logistics Practices in Manufacturing Industries: An Indian Context.” Benchmarking: An International Journal 22, no. 5 (2015): 874–899.
Stank, Theodore, Chad Autry, Patricia Daugherty, and David Closs. “Reimagining the 10 Megatrends That Will Revolutionize Supply Chain Logistics.” Transportation Journal 54, no. 1 (2015): 7–32.
Tan, Vinh V. “Competency Requirements for Professionals in Logis- tics and Supply Chain Management.” International Journal of Logis- tics: Research and Applications 15, no. 2 (2012): 109–126.
Winter, Marc and A. Michael Knemeyer. “Exploring the Integration of Sustainability and Supply Chain Management: Current State and Opportunities for Future Inquiry.” International Journal of Physi- cal Distribution & Logistics Management 43, no. 1 (2013): 18–38.
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