INTRODUCTION TO LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Prof. Jarosław Witkowski, PhdChair of Strategic Management and Logistics

Wroclaw University of EconomicsKomandorska Street 118/120, 53-345 Wroclaw,

Poland E-mail: jwit@ae.jgora.pl

Lecture outline

1.Definition and main activities of business logistics

2. Trade-offs analyses3. Idea of supply chains4. Supply Chain Management matrix5. Supply chain performance and efficiency

improvement (SCOR and GSCF models)6. Japanese and European supply chain

networks 7. Simple EOQ formula8. Center of Gravity Technique

Logistics (according to CLM) 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 point of origin to point of consumption for the purpose of conforming to customer requirements

The mission of logistics is to get the right goods or services to the right place, at the right time, and in the desired condition and quantity in relation to customers order

Main logistics activities and decisions: • cooperate with marketing to set customer service

levels,• facility location decisions,• transportation activities (eg. transportation mode

selection, vehicle scheduling, carrier routing),• inventory management (inventory short -term

forecasting, planning and control, cooperate with production to calculate EOQ, sequence and time production ),

• information collection and flows and order processing,• warehousing and materials handling,• packaging and packing.

Cost- revenue trade- offs

Profits at different levels of customer serviceRevenue, costs, profit

Logistics costs

85% 91% 95%

Customer service

Revenue

Inventory costs trade- off

• Inventory carring costs (space costs, capital costs, inventory risk and services costs)

• Procurement costs (acquisition costs, transportation costs, manufacturing and handling costs)

• Out – of – stock costs (lost sales and back order costs)

Supply chain (since 80’s of XXc.)

• In broader sense „SC is any combination of processes, activities, relationships and pathways along which products, services, information and financial transactions move in and between enterprices” (Gattorna 2006, p. 2)

• In narrow sens SC is restricted to materials and information flows from suppliers, through manufactures and distribution centers to retailers and final customers e.g. M. Christopher (2005) defines SC „as a network of connected and independent organizations mutually and cooperatively working together to, control, manage and improve the flow of materials and informations from suppliers to end users”.

Council of Supply Chain Management Professionals (former Council of Logistics Management ): “Supply Chain Management is the systemic, strategic coordination of the traditional business functions and the tactics across business functions within a particular company and across businesses within the supply chain for the purposes of improving the long- term performance of the individual companies and a supply chain as a whole” (CSCMP 2005).

According to the new definition of CSCMP

• SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities (including coordination and collaboration with channel partners).

• In essence SCM integrates supply chain and demand management within and across companies

GSCMF (Lambert and others)

• SCM is the integration of key business processes from end user through original supplier that provides products, services and information that add value for customers and other stakeholders.

• GSCMF vs. SCOR model (8 vs 5 key processes)

Supply Chain Operations Reference Model

                                                 

Global Supply Chain Managgement Forum Model (from 1996)

Customer Relationship Management (key)Demand ManagementOrder FulfillementManufacturing Flow ManagementSupplier Relationship Management (key)Product DevelopmentCommercializationReturun Management

Based on the product – relationship matrix Cooper and Slagmulder (1999, p.10) distinguished four key decisions and activities areas in the integrated supply chains, such as:- configuration of product and network, which covers the decisions concerning the main rules of cooperation,

- formation of the production network, mainly the choice of production facility and warehousing locations as well as their capabilities, - product design with involvement the research and development abilities of suppliers,- process optimization in order to reduce cycle times and inventory level in the cost-effective way.

The product- relationship SCM matrix

K E I R E T S U

JIT

TQM

Kanban

JIT

TQM

Kanban

JIT

TQM

Kanban

JIT

TQM

Kanban

Supplier Producer Wholeseler Retailer

K a i z e n

Keiretsu and Kaizen as a source of the development of Supply Chain Management in Japan

The traditional role and place of small firms within integrated supply chains was mostly limited):- delivering raw- materials, parts or modules for the final goods producers,- delivering customer goods to wholesalers or selling small quantities of this goods to the final customers,- providing transportation and forwarding services, - manufacturing goods and providing other services for market niches which are considered as not enough profitable for big companies (also as a subcontractor),- trading under well known brand name of large distribution networks (franchising)

Table: The directions of SME’s changes as a links in supply chains and networks

Scope of changes in SME’s Hierarchical supply chains Polycentric supply network

Competences and skills

FlexibilityRole of small retailersKey intermediary

Dominant logistics services model Small truck companies

Source: Author’s own discription

Narrow in particular technological or functional areas Low or middleLow and passiveWholesaler or large retail network Self- or combined- service model Large number of independent firms

Wide based on process orientation, ability to performance evaluation and outsourcingMiddle or highIncreasing and active Brokers or third party logistics providersPublic logistics service providers Subcontractors dependent on market leaders

New vs. Traditional logistics

• Integration (within organizational structures, computer systems, supply chain and network)

• Strategic approach• Outsourcing • Globalization and virtualization • Customer orientation• City logistics and non- conventional

applications

EOQ simple formula (Harris, Wilson)

Economic order quantity formula helps to find the optimal number of units which should be ordered or made in order to minimize the total inventory costs

Developed in 1913 by Harris and applied in industry by Wilson

Many disadvantages and several extensions

Main assumptions (disadvatages) of EOQ formula

• Demand and ordering cost are constant • Maximum inventory is equal to order quantity, new order is delivered when the inventory is zero• Lead time is fixed• No discount is avaliable for bigger orders• Replenishment is delivered at once • Lack of inflation

The required parameters to calculate EOQ:

• D – demand quantity (units per year, month, day)• P – purchase cost per each item• S – fixed cost per order• i – inventory carring cost rate related to capital invested in

inventory • Q – order quantity • D/Q – number of orders

How to calculate EOQ based on total cost function?

Facility location factors:

A.Weber, Polander, Thunen classical theories • Labour cost, land cost, transportation cost• Aviability and cost of materials, energy, water• Socio- economic factors (taxes, political

stability, import and export restrictions, enviromental regulations, quality of life, etc.)

Analytical techniques for facility location decisions:

• Heuristic approach (e.g. factor rating by weights reflecting the importance of each factor)

• Simulation models• Cost- benefit analisis• Center of gravity technique

Center of gravity (to find single location that minimizes of

transportation cost) Technika „Centrum Grawitacji”

X c (x,y) 0 Y

S3(x3’; y3’)

S1(x1’; y1’)

Z2(x2 ; y2)

S2(x2’; y2’)

Z1(x1 ; y1)

How to calculate the coordinates for CX and CYthe new facility location?

(Ballu, p.487)

Assumptions (disadvantages) of center of gravity technique

• Transportation rate is a linear function of transported volume (units, tons, etc.) and the traveling distance,

• It doese’t consider real traveling distance which is depended on the roads availability

References:• [1] Ballu R.H.: Business logistics management, Prentice Hall International,

New Jersey 1999 • [2] Christopher M.: Logistics and Supply Chain Management. Creating

Value – Adding Networks, Prentice Hall 2005 • [3] Gattorna J.: Living Supply Chains. How to Mobilize the Enterprise

Around Delivering What Your Customers Want, Prentice Hall, 2006• [4] SCOR model http://supply-chain.org/• [5] CSCMP Supply Chain Management Definitions , www.cscmp.org • [6] Cooper R., Slagmulder R.: Supply Chain Development for the Lean

Enterprise – Inter- organizational Cost Management, Productivity Press Portland 1999

• [7] Witkowski J.: Zarządzanie łańcuchem dostaw. Koncepcje, procedury, doświadczenia, PWE, Warszawa 2010