Introduction to Logistics and Supply Chain Management_nuovograficoGDPExport-V3

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LOGISTICS MANAGEMENT

1. Introduction to Logistics and Supply

Chain Management

Prof. Alessandro PeregoPolitecnico di Milano

1. Introduction to Logistics and Supply Chain Management 2

Learning objectives

! “Logistics” and “Supply Chain Management”: key-

words and definitions

! The evolution of the Logistics concept from PhysicalDistribution System Management in the ’70s to

Supply Chain Management in the ’90s

! A 3-stack model of Logistics/Supply ChainManagement : from logistics execution, to supply

chain planning, to supply chain design and strategy

! The main activities of Logistics Management

! Why Logistics and Supply Chain Management arekey Business Management topics




2. The 3 “stacks”of logistics

management

1.Logisticsand supply

chain

management

Agenda

3. Theimportance of

Logistics


Logistics Management

“Logistics Management is that part of supply chainmanagement 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.”

CSCPM (Council of Supply Chain ManagementProfessionals)




Council of Supply Chain

Management Professionals

(www.cscmp.org)Founded in 1963, it is the preeminent association for individuals involved

in supply chain management

CSCMP was originally founded as the National Council of Physical

Distribution Management (NCPDM) in January 1963. NCPDM was formed

by a visionary group of educators, consultants, and managers who

envisioned the integration of transportation, warehousing, and inventory

as the future of the discipline. At that time, physical distribution was just

beginning to edge its way into the corporate lexicon and make its

considerable presence felt in the business community.

In 1985, recognizing the growing field of logistics, the association's focus

broadened as it changed its name to the Council of Logistics Management

(CLM). It stayed that way until 2004 when CLM's Executive Committee

voted to become CSCMP, the Council of Supply Chain Management

Professionals (CSCMP)


Time

Integration

scope

1960 1970 1980 1990 2000

Distribution of

finished products

Internal Supply

Chain

External Supply

Chain

Physical DistributionManagement, Materials

Management

Integrated Logistics (MaterialsManagement + Physical

Distribution)

Supply Chain Management

The evolution of Logistics




The evolution of the logistics

concept: distribution A term employed in manufacturing and commerce todescribe the broad range of activities concerned with

efficient movement of finished products from the end of

production line to consumer, and in some cases includes

the movement of raw materials from the source of supply

to the beginning of the production line .

NCPD (National Council of Physical Distribution

Management), 1967

! Efficient: emphasis on cost reduction

! From production line to consumer: emphasis on the distributionsystem

! Movement of finished products: emphasis on materials handing and

transportation


INTEGRATION OF “PARTS” OF THE INTERNAL SUPPLY CHAIN

FOCUS

• DISTRIBUTION OF THE END PRODUCTS or SUPPLY OF RAW

MATERIALS/PRODUCTION

• SINGLE COMPANY

• REDUCTION OF THE DISTRIBUTION or SUPPLY/PRODUCTIONCOSTS

Suppliers CustomersSupply Production Distribution

Physical Distribution/Materials

Management




Physical Distribution

Management! Focus: distribution of end products with a systemic

view of transportation, storage, inventory

management, packaging and materials handling

! Methodologies: systemic approach, total costanalysis, trade-off analysis, operational research

techniques (inventory management models, demand

forecasting algorithms, site location, etc.)

! Organization: “Distribution Manager”

! Awareness: the National Council of PhysicalDistribution Management is founded in 1963


Time

Integration

scope

1960 1970 1980 1990 2000

Distribution of

finished products

Internal Supply

Chain

External Supply

Chain

Integrated Logistics (MaterialsManagement + Physical

Distribution)




Management





concept: integrated logistics

The integration of two or more activities for the purposeof planning, implementing, and controlling the efficient

flow of raw materials, in-process inventory and finished

goods from point-of-origin to point-of-consumption”.

NCPD (National Council of Physical DistributionManagement), 1976

! Integration: emphasis on the value of global optimization (as opposed

to local optimization)

! Plan, implement and control: not only execution, emphasis on logisticsas a business management discipline

! From point of origin to point of consumption: first inclusion of the

(internal) “supply chain perspective”




The process of planning, implementing, and controllingthe 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”.

CLM (Council of Logistics Management),1985

! Process: it is the first explicit recognition that Logistics is a process

! Related information: not only flow of goods but also flow ofinformation

! Conforming to customer requirements: it is the ultimate objective of

logistics, not only efficiency and cost.-effectiveness






The process of planning, implementing, and controllingthe efficient, effective flow and storage of goods,

services, and related information from point-of-origin to

point-of-consumption for the purpose of conforming to

customer requirements .

CLM (Council of Logistics Management), 1992

! Effective: not cost-effective but effective tout court

! Services: logistics management applies also to the provision ofservices (healthcare, after-sales, engineering&contracting, …)


INTEGRATION OF THE INTERNAL SUPPLY CHAIN

FOCUS

• SUPPLY+PRODUCTION+DISTRIBUTION

• SINGLE COMPANY

• REDUCTION OF THE OVERALL LOGISTICS

COSTS

Integrated Logistics

Suppleirs CustomersSupply Production Distribution




Integrated Logistics

! Focus: focus on the overall logistics system with theintegration of the different sub-processes of

Materials Management, Production Management,

Physical Distribution

! Methodologies: systemic approach, total costanalysis, integrated planning principles, competitive

value of the customer service

! Organization: “Logistics Manager”

! Awareness: the National Council of PhysicalDistribution Management becomes the Council of

Logistics Management


Time

Integration

scope

1960 1970 1980 1990 2000

Distribution of

finished

products /

Supply of raw

materials

Internal Supply

Chain

External Supply

Chain

Integrated logistics (MaterialsManagement + Physical

Distribution)




Management




rawmaterialsupply

rawmaterialstorage

manufactu

ring

finishedgoods

storage

Market(user

orcustome

r)

Plant

Plant

Warehouse

Warehouse

Warehouse

Storage

Storage

Storage

Inbound supply chain Outbound supply chain

The Supply ChainIt includes the different members, infrastructures and resources,processes and activities (and all the links among them) that allow the

replenishment of raw materials, their transformation in components

and products and the distribution of products to end customers


The Food Supply Chain

Logistics Service Providers

Raw materialssuppliers

Wholesalers

HO.RE.CAWholesalers

Catering(big chains)

Small shops

Customers

LargeRetailers

Manufacturers




The Pharma Supply Chain

L o g i s t i c

s

s e r v i c e

p r o v i d e r s

Raw materialssuppliers

Outsourcers

Packaging suppliers

HospitalsPharmacies

Distributors

3rd party

logistic providers

Manufacturers



concept: supply chain management

“Logistics Management is that part of supply chainmanagement 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.” CSCPM (Council ofSupply Chain Management Professionals), 2009

! Part of supply chain management: Logistics is part of a more

comprehensive concept, Supply Chain Management

! Reverse flow: Logistics is also about the reverse flow of goods andinformation from the point-of-consumption backward





“Supply chain management is an integrating function with primary

responsibility for linking major business functions and business

processes within and across companies into a cohesive and high-

performing business model. It includes all of the logistics

management activities, as well as manufacturing operations, and it

drives coordination of processes and activities with and across

marketing, sales, product design, finance, and information

technology. ”

CSCPM (Council of Supply Chain Management Professionals)

Supply Chain Management includes all the inter-company processes,i.e. the processes which extend outside the company boundaries

and span over the whole supply chain (logistics, new product

development, marketing, etc.).


INTEGRATION OF THE EXTERNAL SUPPLY CHAIN

FOCUS

• ENTIRE SUPPLY CHAIN

• VALUE OF THE CUSTOMER SERVICE

• OVERALL LOGISTICS COST TO SERVE THE FINAL CUSTOMER

• SUPPLY CHAIN BASED COMPETITION

Supply chain management

Suppliers CustomersSupply Production Distribution




Supply chain management

! Focus: focus on the Supply Chain as a whole;competition among supply chains; logistics as a

differentiation lever

! Methodologies: analysis of supply chainperformance, supply chain integration, collaborative

planning models (VMI, CPFR)

! Organization: “Supply Chain Manager”

! Awareness: the Council of Logistics Management

becomes the Council of Supply Chain ManagementProfessionals

Strategic approach where:

! Competitiveness of the company is strongly impacted by

the actions of the other supply chain members

! Competitiveness is, first of all, between different supplychains (and not between companies of the same supply

chain)

Strategic implications

! Competitiveness of the company can be improved

focusing on the interface processes with the other supplychain members, through integration and collaboration

! In many cases the action on the interface processes is

more effective (in terms of impact on KPIs) than that on

internal processes

Supply Chain Based Competition




What is the amount of inventory (of finished products) in thewarehouses of manufacturers and retailers?

! 40 days of inventory (on average) in the warehouses of the

manufacturers (including both cycle and safety stock)

! 20 days of inventory in the warehouses of the retailers

(both distribution centres and backrooms) (including

safety, cycle and speculative stock)

What is the average value of the on-shelf availability in thestores of the retailers?

! 93% as an average of all the the different types of products.This means that 7 times out of 100, consumer does not find

what he is looking for (Source: GS1 Europe)

Performances of the FMCG

supply chain


How much does the order-delivery-invoicing-payment cyclecost?

! Approximately 80 ! /cycle (from order to payment), of which

50% due to the management of the activities generated byerrors…

! …equally split among manufacturer and retailer

(Source: Electronic Invoicing Observatory - Politecnico MI)

What is the average saturation of the means of transportation

used by manufacturers to deliver their products to retailers?

! Approximately 70% for the single trips (do hope that returns

are not empty!)…

! … with a very limited adoption of “multi-drop”deliveries

Performances of the FMCG

supply chain






management

1.Logistics andsupply chain

management

Agenda

3. Theimportance of

Logistics


sourceSuppliers

PERFORMANCE MEASUREMENT SYSTEM

SUPPLY CHAIN PLANNING

LOGISTICS EXECUTION

stockmake deliver

SUPPLY CHAIN DESIGN AND STRATEGY

The 3 stacks of logistics management

Decision

level

Operatio

nal

Tactical

Strategic

DemandInventoryDistributionProduc-

tionSupply

PERFORMANCE MEASURES

Logistic costs

#

Customer service




1. Logistics Execution

Logistics Execution includes the design and managementof the processes that support the flow of materials

(handling, storage, physical transformation and transport

activities) and data/documents along the supply chain

! It is the most traditional “scope” of Logistics (but it is only part of its

most comprehensive scope)

! It is the base upon which all the other stacks are built (therefore itrepresents the “basics” a good logistician must know)

Company A

Transport

Trasforma - zione fisica

Stoc - caggio Picking Messa a

Stoc - caggio Physical -

transform. Warehouse

Picking Receiving Storing Stoc - Warehouse - Shipping


2. Supply Chain Planning

Supply chain planning is the process that plans for theadjustment of the operational capacity and for the

execution of the operational activities linking the demand

and the supply sides of the supply chain. It aims at

“getting the supply chain aligned and tuned”

! This is the stack that “plans and manages” the operational level of

logistics

! It should be an integrated process (and not merely a collection ofphases)

! It should consider both the structure of the distribution network and

all the specific operational constraints

Demand

Planning

Inventory

Planning

Distribution

Planning

Production

Planning

Procurement

Planning

CUSTOMERS SUPPLIERS




3. Supply chain design and

strategySupply chain design and strategy aims at defining:(1) the logistics network structure (supply network,

production network and distribution network)

(2) the transportation modes (road, rail, ship, inter-modal,

etc.)

(3) the “make or buy” policies

! These decisions must be strongly aligned with theoverall company strategy (markets served, product range,

trade channels, etc.)

! These choices have to consider the specific features/

constraints of both the planning process and the logistics

execution process


LOGISTICS

PROCESS

Performance

measurement

Gap

analysis

Environment

Objective performances

The performance measurement

system

Main choices:

! the metrics

! the measurement techniques

! the process: phases, responsibilities, frequency,

reports, etc.

Actions





management

1.Logistics andsupply chain

management

Agenda

3. Theimportance of

Logistics


Importance of Logistics and


In a nutshell the importance of logistics and supply chainmanagement (L&SCM) depends on the following reasons:

! L&SCM are non-discretionary activities that must beaccomplished to deliver the right value to the right

customer

! These activities are costly: L&SCM related costsrepresent on average between 5 and 15% of revenues

and more if a supply chain perspective is taken

! They have a substantial impact on the assets of acompany (inventories, manufacturing plants, transport

vehicles, …)

! ….




Cost of logistics as % of sales

Administration

Inventory

Warehousing

Transportation

1987

5,9%

2,4%

2,5%

1,3%

1993

3,9%

1,8%

1,7%

1,2%

1998

2,8%

1,6%

1%

1%

2003

3,1%

1,5%

0,8%

0,8%

2008

3,5%

1,8%

1,2%

0,8%

2013

3,8%

1,8%

1,3%

0,8%

12,1%

8,5%

6,4% 6,1%

7,3%7,7%

-30%

-25%

-4%+20%

+5%

Source: European Logistics study 2008-2009 (ELA – AT Kearney)

Globalization: export grows

more than GDP


Source: World Economic Outlook Database, October 2013 (International Monetary Fund)



The evolution of the market

Trends in factors of production in Europe


60

80

100

120

140

160

2009 2010 2011 2012 2013 (*)

Fuel

Energy

Price of money

Costs of renting

Labour costs -employees

Labour costs - external

workers

(*)Values referred to the first 8 months of 2013

In the last years the logistics sector has been facing an

increase in the costs of the factors of production (most of all

labour, energy and fuel)


INDUSTRY War. Admin. Invent. TOTAL

Publishing 3,0% 2,1% 3,6%

Electric appliances 2,6% 2,9% 4,6%

Wholesalers 3,0% 2,2% 2,9%

Food & beverage 2,2% 1,7% 2,8%

Consumer electronics 2,0% 2,5% 3,8%

Chemical 2,3% 1,5% 2,6%

Mechanical 2,2% 1,9% 2,9%

Automotive 2,3% 1,2% 2,7%

Retail 3,0% 1,6% 2,0%

Pharmaceutical

Transp.

4,7%

2,5%

2,9%

3,7%

2,0%

3,8%

2,3%

2,7%

2,3%

2,2% 2,0% 2,1% 2,5%

13,4%

12,6%

11,0%

10,4%

10,3%

10,2%

9,3%

8,9%

8,9%

8,8%

The incidence of the logistic costs on the revenuesSource: ELA-AT Kearney (early 2000s)

The incidence of logistic costsAn analysis by industry



Cost of logistics as % of sales in

different industries


Source: the Benchmarking Institute 2007


Politecnico di Milano (early 2000s)

The incidence of logistic costsAn analysis by supply chain: the textile – apparel

Logistic costs

Net margin

Industrial costs

Added value

Suppliers Manufact. Distributors Overall

supply chain

10 1,83,2

23

43,3

35

11,58

69

14,5

16,5

15,3

30,3

54,5 100

22

15,51,5

22,8

6,84,5

6

43

22,3

12,7

6,5

55,2 100

Financial cost (inventories)

Obsolescence costs

Other costs (administration, quality, …)

Transportation and handling

23

5

15,5

49,5

6,2

Suppliers Manufact. Distributors Overall

supply chain




Importance of Logistics and

Supply Chain Management In a nutshell the importance of logistics and supply chainmanagement (L&SCM) depends on the following reasons:

! L&SCM are non-discretionary activities that must beaccomplished to deliver the right value to the right

customer

! These activities are costly: L&SCM related costsrepresent on average between 5 and 15% of revenues

and more if a supply chain perspective is taken

! They have a substantial impact on the assets of acompany (inventories, manufacturing plants, transport

vehicles, …)

! Last but not least L&SCM affects the top line of theprofit&loss, i.e. revenues (customer service, lost sales,

…)


Customer service

Many customer service factors are strongly affected bythe logistic process and should be considered as key

performance indicators of the process itself:

! the order-delivery cycle time

! the delivery accuracy

! the order fill rate

! tracking information from order to delivery

! …

Input

(resources)Output Customers

CUSTOMER SERVICE

LOGISTIC PROCESS




Product

Price

Customer service

Promotion

Food Chemical Pharmac Auto Paper Electronics Textiles Total

34,8

25,8

20,0

19,4

33,0

34,8

19,1

13,1

36,9

29,4

17,3

16,4

26,8

29,8

33,5

9,9

23,2

35,8

28,9

12,1

41,3

26,5

21,8

10,4

34,7

22,0

22,8

20,5

33,3

29,9

22,4

14,4

“Importance of Marketing Variables by Industry” Council of Logistics Management 1988

The “weight” of marketing mix

variables

= the most important variable in the industry

= the second most important variable

Already 20 years ago the importance of Customer Service wasin line with the importance of more traditional product mix

variables such as price and product

Service level expected by the customers

of the Logistic Service Providers (LSPs)


96% 96,3%

98,3% 98,8%

97,1%98,4% 98,9%

96,2%

93,2%93,7%

91,7%

89%

93%92,2%

88,2%88 %

1993 1998 2003 2008 1993 1998 2003 2008

Service level expected by the customers of the LSPs

Service level given by LSPs

On time deliveries Complete deliveries

Source: European Logistics study

2008-2009 (ELA – AT Kearney)




Supplementary Readings

! Cooper, Lambert, Pagh, 1997, Supply chain

management: more than a new name for logistics,

International journal of logistics management,volume 8, pp.1-14

! Coyle, Bardi, Langley, Supply Chain Management,

The management of business logistics, a supply

chain perspective, pp. 1-73


Relevant websites

Logistics and Supply Chain Management association websites:

! www.cscmp.org

! wwww.elalog.org

! www.sole.org

Practitioner Websites and industry insights:! www.logisticsworld.com

! www.logistics.about.com

! www.logisticstoday.com

! www.supply-chain.org

! www.logisticsmanager.com

! www.scmr.com

! www.supplymanagement.co.uk




Challenge questions

! Suppose you are asked to tell why Logistics is not

only Warehousing and Transportation. What would

be your line of reasoning? Which could be theactivities under the responsibility of a Logistics or

Supply Chain Executive?

! What is the main idea behind the foundation of

Logistics as a new discipline?

! What is the difference between Logistics and Supply

Chain Management?! Build a strong case in favour of the following

statement: Logistics is crucial for a Retailer in the

Fast Moving Consumer Goods sector

Documents

Introduction to Logistics and Supply Chain Management_nuovograficoGDPExport-V3