LOGISTICS MANAGEMENT

Dr. Özgür Kabak

 This Class is about the vital subjects of business
logistics / supply chain – an area of management that
can be essential to a firm’s competitive strategy and
revenue generation.

 Physical distribution / Materials management /

Transportation management / Logistics / Supply chain
management

 The business activities of concern

 Transportation, inventory maintenance, order processing,
purchasing, warehousing, materials handling, packaging,
customer service standards, and production.
WHO AM I?
 Özgür Kabak, PhD.
 Lecturer at Industrial Engineering Dept. of Istanbul
Technical University (ITU)

 PhD from ITU

 2008
 Modeling supply chain network using possibilistic linear
programming and an application

 Postdoc at Belgium Nuclear Research Centre

(SCK.CEN), Mol, Belgium
 Feb. 2009 – Feb. 2010
 A fuzzy multiple attribute decision-making approach for nuclear
safeguards information management
COURSE ORGANIZATION
 Contact information
 e-Mail kabak@itu.edu.tr
 phone (212)2931300 ext.2039
 webpage http://web.itu.edu.tr/kabak/Logman.htm
COURSE ORGANIZATION
 Introduction to Logistics and Supply Chain
 Logistics/Supply Chain Product

 Customer Service

 Transport Fundamentals

 Transport Decisions

 Forecasting Supply Chain Requirements

 Inventory Policy Decisions

 Purchasing Decisions

 Location Strategy
LOGISTICS NETWORK
COURSE ORGANIZATION
 Text Books:
 Ballou, R.H. 2004, Business Logistics / Supply chain
Management, Pearson Prentive Hall, New Jersey
 Chopra, S., Meindl, P. 2010, Supply chain management:
Strategy, planning, and operation, Pearson, Boston
GRADES
 2 Assignments 20%
 To be announced: April 27, due date: May 4
 To be announced: June 8, June 15

 Midterm exam 30 %
 May 18
 Final exam 50%
 June 29
NEXT CLASS
 Bring a one page CV
INTRODUCTION TO LOGISTICS AND
SUPPLY CHAIN
 What is Supply Chain Management (SCM)?

 What is the difference (if any) between SCM and

Business Logistics Management?
THE IMMEDIATE SUPPLY CHAIN FOR AN
INDIVIDUAL FIRM

Transportation Transportation Customers

Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation
Source: Ballou (2004)
LOGISTICS VS SUPPLY CHAIN MANAGEMENT
Logistics
• Logistics is the process of
planning, implementing and
controlling
• the efficient, cost-effective
• flow and storage of
• raw materials, in-process
inventory, finished goods and
related information
• from the point of origin to point
of consumption
• for the purpose of conforming to
customer requirements.
Council of Logistics
Management
Supply Chain Management
• SCM is the integration of all
activities
• associated with the flow and
transformation of goods
• from raw materials through to
end user,
• as well as information flows,
• through improved supply chain
relationships,
• to achieve a sustainable
competitive advantage.
Handfield and Nichols
 EVOLUTION OF SUPPLY CHAIN MANAGEMENT
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Source: Ballou (2004)

LOGISTICS VS SCM
FOCUS OF INTEREST

Source:
http://www.argeelogistics.com/Services/SUPPLY_1/supply_1.HTM
SUPPLY CHAIN SCHEMATIC

Source: Ballou (2004)

THE LOGISTICS/SC MISSION

Getting the right goods or

services to the right place, at
the right time, and in the desired
condition at the lowest cost and
highest return on investment.
LOGISTICS ACTIVITIES IN A FIRM’S IMMEDIATE
SUPPLY CHAIN
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Source: Ballou (2004)

THE ACTIVITY MIX
 Key Activities:
 Setting customer service standards
 Transportation
 Inventory management
 Information flows and order processing

 Support Activities:
 Warehousing
 Materials handling
 Purchasing
 Protective packaging
 Product scheduling
 Information maintanence
THE CRITICAL CUSTOMER SERVICE LOOP

Customer order processing (and

transmittal)

Transportation
Customers

Inventory
or supply source

Source: Ballou (2004)

PROCESS VIEW OF A SUPPLY CHAIN
 Cycle view: processes in a supply chain are divided
into a series of cycles, each performed at the
interfaces between two successive supply chain
stages
 Push/pull view: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)
CYCLE VIEW OF A SUPPLY CHAIN

 Each cycle occurs at the interface between two

successive stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)

 Cycle view clearly defines processes involved and the

owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
CYCLE VIEW OF SUPPLY CHAINS
Customer

Customer Order Cycle

Retailer

Replenishment Cycle
Distributor

Manufacturing Cycle
Manufacturer

Procurement Cycle
Supplier

Source: Chopra and Meindl (2010)

PUSH/PULL VIEW OF
SUPPLY CHAIN PROCESSES
 Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
 Pull: execution is initiated in response to a
customer order (reactive) - * to-order
 Push: execution is initiated in anticipation of
customer orders (speculative) *to-stock
 Push/pull boundary separates push processes from
pull processes
SUPPLY CHAIN INTEGRATION
 Push-Based Supply Chain
 Production and distribution decisions are based on long-term forecasts
 may result with increased transportation costs, high inventory levels and/or
high manufacturing costs due to the need for emergency production
changeovers
 Pull-Based Supply Chain
 Production and distribution are demand-driven so that they are
coordinated with true customer demand rather than with forecast
demand
 Decrease in lead time through the ability to better anticipate incoming orders
from retailers
 Decrease in inventory at retailers due to lead-time reduction

 Decrease in the variability of the system due to lead-time reduction

 Decreased inventory at the manufacturer due to the reduction in variability

but
 Difficult to implement when lead times are so long that it is impractical to
react to demand information
 Difficult to take advantage of economies of scale
 PUSH/PULL VIEW OF SUPPLY CHAINS
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives

Source: Chopra and Meindl (2010)

PUSH/PULL VIEW OF
SUPPLY CHAIN PROCESSES
 Useful in considering strategic decisions relating to
supply chain design – more global view of how
supply chain processes relate to customer orders
 Can combine the push/pull and cycle views
 Dell
 The relative proportion of push and pull processes
can have an impact on supply chain performance
SUPPLY CHAIN INTEGRATION
 Push-Pull Supply Chain(a hybrid approach)
 Some stages of the supply chain, typically the initial stages are
operated in a push-based manner, whereas the remaining stages
employ a pull-based strategy
 The interface between the push-based stages and the pull-based
stages is known as the push-pull boundary
 Example: personal computer manufacturer

 Component inventory is managed based on forecast but

final assembly is in response to a specific customer request

 The push portion is prior to assembly, whereas the pull part
starts with assembly and is performed based on actual customer
demand
CHARACTERISTICS OF THE PULL AND PUSH
PORTIONS OF THE SUPPLY CHAIN

Push Pull

Objective Minimize cost Maximize

service level
Complexity High Low

Focus Resource Responsiveness

allocation
Lead Time Long Short

Processes Supply chain Order fulfillment

planning
EX: L.L. BEAN, AN APPAREL COMPANY
MAKE-TO-STOCK

PULL PROCESSES
Customer
Customer Order Cycle

Customer order L.L.Bean

arrives Replenishment and
Manufacturing Cycle

PUSH PROCESSES Manufacturer

Procurement Cycle
Supplier

Source: Chopra and Meindl (2010)

EX: DELL COMPUTERS
BUILT-TO-ORDER

PULL PROCESSES
Customer
Customer Order and
Manufacturing Cycle
Customer order Manufacturer
arrives
Procurement Cycle

PUSH PROCESSES Supplier

Source: Chopra and Meindl (2010)

WHY LOGISTICS/SCM IS IMPORTANT?
COSTS ARE SIGNIFICANT!
 Physical Distribution Costs

Category % of sales $/cwt.

Transportation 4.08% $34.15
Warehousing 1.75 12.90
Order entry / 0.43 4.51
Customer Service
Administration 0.23 1.78
Inventory carrying 1.79 14.63
Total 8.28% $67.97
Source: The Davis Logistics Cost and Service Database 2010
http://www.establishinc.com/davisdatabase_info.asp
LOGISTIC COSTS AS PERCENTAGE OF SALES

Source: The Davis Logistics Cost and Service Database 2010

http://www.establishinc.com/davisdatabase_info.asp
WHY ARE OVERALL COSTS RISING?
 The average company in our trend group has incurred a cost
increase in almost every cost category except
administration and oversight.
 Not all increases are necessarily negative. There has been an uptick
in warehouse technology improvements in both internal and
external operations. These are physical assets and have a capacity
based on size and technology. During periods of slower demand, it
is easier to justify a disruption to improve operations.
 More companies are shifting to include more direct to consumer
order fulfillment adding to the single SKU (Stock keeping-unit),
single item orders.
 Increases in inventory are easier to justify with a lower cost of
capital and capacity constraints in importing products. With lower
returns investing elsewhere, companies are “betting” on
themselves.
 Companies continually focus on ways to reduce transportation
costs by changing modes, negotiating rates and passing on more
transportation costs to the customer (when possible). For the first
time, many companies are leveraging their total volumes.

Source: The Davis Logistics Cost and Service Database 2010

http://www.establishinc.com/davisdatabase_info.asp
WHY LOGISTICS/SCM IS IMPORTANT?
CUSTOMER SERVICE LEVEL EXPECTATIONS INCREASING!
 Customer Service Level: The prompt and complete delivery of
goods ordered
96 10

94 9

92 8

90 7

88 6

86 5

84 4

82 3

80 2

78 1

76 0
1 2 3 4 5 6 7 8 9 10

Product Availability (% Orders) Product Availability (% Lines)

Product Availability (% Cases) Total CycleTime (Days)
Source: The Davis Logistics Cost and Service Database 2010
http://www.establishinc.com/davisdatabase_info.asp
WHY LOGISTICS/SCM IS IMPORTANT?
 Costs are high
 About 10.5% of GDP domestically
 About 12% of GDP internationally
 A range of 4 to 30% of sales for individual firms, avg. about 10%
 A high as 70-80% of sales if purchasing and production are included
 Customers are more demanding of the supply chain
 Desire for quick response
 Desire for mass customization
 An integral part of company strategy
 Generate revenue
 Improve profit
 Logistical lines are lengthening
 Local vs. long distance supply
 Logistics is a key to trade and an increased standard of
living
 Law of comparative economic advantage applies
 Logistics adds value
 Time and place utilities
EFFECT ON LOGISTICS FOREIGN OUTSOURCING
Domestic sourcing Foreign sourcing
Profit Profit Increase
G&A G&A
Marketing Marketing

Logistics Increase
Logistics

Overhead Tariffs
Overhead
Materials
Materials

Labor Reduction
Labor

Source: Ballou (2004)

ZARA: APPAREL MANNUFACTURING AND
RETAIL
 Zara is a chain of fashion stores owned by Inditex.
 In 2007:
 Sales : 9.5 million euros
 3600 retail outlets in 68 countries

 In an industry in which customer demand is fickle, Zara

has grown rapidly with a strategy to be highly
responsive to changing trends with affortable prices.
 Whereas design to sales cycle times in appereal
industry have traditionally averaged more than 6
months, Zara has achieved cycle times of four to six
weeks.
 Change 75% of its merchandise display every 3-4 weeks
 Sells most of its products at full price
KEY OF ZARA’S SUCCESS
 Inditex Chief Executive J.M.Castellano:
 «This business is all about reducing response time. In
fashion, stock is like food. I goes bad quick»

 Three winning formulae to bake its fashions:

 Short lead time = More Fashionable clothes
 Lower quantities = Scarce supply
 More styles = More choice, and more chances of hitting
it right

Source:
www.3isite.com/articles/ImagesFashion_Zara_Part_I.pdf
ZARA: APPAREL MANNUFACTURING AND
RETAIL
 Zara manufactures its apparel using combination of
flexible and quick resources in Europe (mostly in
Portugal and Spain) and low cost sources in Asia.
 40% of the manufacturing capacity is owned by Inditex, with
rest outsourced.
 Products with highly uncertain demand are sourced out of
Europe
 Products that are more predictable are sourced from its Asian
Locations
 More than 40% of its finished-goods purchases and most of
in-house production occur after the sales season starts. (less
that 20% for typical retailer)
 This responsiveness and the postponement of the decisions
until after trends are known allow Zara to reduce inventories
and forecast errors.
 Invested highly in IT to ensure that the latest sales data
are available to drive replenishment and production
decisions.
ZARA: APPAREL MANNUFACTURING AND
RETAIL
 8 distribution centers in Spain
 The group claimed delivery times (order received
in the Distribution center to the time it is delivered to
store) of
 24 hours for European Stores
 Up to a maximum of 40 hours for stores in America and
Asia.

 In 2007 Inditex distributed 627 million garments

globally.
LOGISTICS INTERFACES WITH
MARKETING AND PRODUCT

LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ Transport Interface Sample
OPERATIONS  Inventory
Interface activities: activities:
Sample activities:  Order  Customer
 Quality control activities:  Promotion
 Product processing service  Market
 Detailed production
scheduling
scheduling  Materials standards research
 Plant  Pricing  Product
 Equipment maint . handling
location  Packaging
 Capacity planning mix
 Purchasing  Retail  Sales force
 Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

Source: Ballou (2004)

 RELATIONSHIP OF LOGISTICS TO MARKETING
Product

Promotion
Price

Place-Customer
service levels
Logistics

Inventory Transport
carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
RELATIONSHIP OF LOGISTICS TO
PRODUCTION
 Coordinates through scheduling and strategy—
make-to-order or make-to-stock
 An integral part of the supply chain
 Affects total response time for customers
 Shares activities such as inventory planning

 Costs are in tradeoff

 Production lot quantities affect inventory levels and
transportation efficiency
 Production response affects transportation costs and
customer service
 Production and warehouse location are
interrelated
SCOPE OF MODERN SUPPLY CHAIN
Scope in
reality

Focus
Company

Suppliers Customers

Supplier’s Customers/
suppliers End users

Acquire Convert Distribute

Product and information flow

LOGISTICS/SC IN DIVERSE AREAS
 Manufacturing—most common
 Environment—causing restrictions

 Service—emerging opportunities

 Non-profits—little explored

 Military—long history
THE PLANNING TRIANGLE IN RELATION TO
THE PRINCIPAL ACTIVITIES OF SCM

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals

CONTROLLING
• Purchasing and supply

ORGANIZING
• Transport decisions
Customer

PLANNING
scheduling decisions
• Storage fundamentals service goals
• Storage decisions • The product
• Logistics service
• Ord. proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process

Source: Ballou (2004)

THE PLANNING TRIANGLE

Inventory Strategy
 Forecasting
 Storage fundamentals Transport Strategy
 Inventory decisions  Transport fundamentals
 Purchasing and supply  Transport decisions
scheduling decisions
Customer
 Storage decisions service goals
 The product
 Logistics service
 Information sys.

Location Strategy
Recall the syllabus  Location decisions
 The network planning process
EXAMPLE A DAPTED FROM BALLOU (2004)

 Suppose that a manufacturer of men’s shirts can produce a

dress shirt in Denizli Plant for 8TL per shirt. Istanbul is a major
market for 100,000 shirts per year. The price of a shirt is 15TL.
Transportation and storage charges from Denizli to Istanbul is
5 TL per hundredweight (cwt.) (Approx.45kg). Each packed
shirt weighs 0.5 kg.
 As an alternative, the company can have shirts produced in
Taiwan for 4TL per shirt. The raw materials would be shipped
from Denizli to Taiwan at a cost of 10TL per cwt. When the
shirts are completed, they are to be shipped directly to
Istanbul at a transportation and storage cost of 15TL per cwt.
An import duty of 0.50TL per shirt is assessed.
 From a logistics-production cost standpoint, should the shirts
be produced in Taiwan?
 What additional considerations, other than economic ones,
might be considered before making a final decision?
NEXT CLASS
 Bring one page CV

 TOPICS:
 Logistics/Supply Chain Strategy and Planning
 The Logistics/Supply Chain Product