Chapter 2:
Dimensions of Logistics
Learning Objectives -
After reading this
chapter, you should be able to do the following:
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Understand the role and importance of
logistics in private and public organizations.
Discuss the impact of logistics on the
economy and how effective logistics
management contributes to the vitality of the
economy.
Understand the value-added roles of logistics
on both the macro and micro level.
Explain logistics systems from several
perspectives.
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Management of Business Logistics, 7th Ed.
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Learning Objectives

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Understand the relationship between logistics
and the other important functional areas in a
company, including manufacturing,
marketing, and finance.
Discuss the important management activities
in the logistics function.
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Learning Objectives


Analyze logistics systems from several
different perspectives to meet different
objectives.
Determine the total costs and understand the
cost trade-offs in a logistics system from a
static and dynamic perspective.
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Logistics Profile:
Jordano Foods
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Jordano Foods is a major vendor for SAB
Distribution, and must decide if it wants a
supply chain relationship with SAB.
Jordano’s CEO put together a study team to
evaluate the impact of adding a logistics
systems approach.
As you read this chapter, look for ways for
Jordano to improve its logistics processes and
supply chain relationship with SAB.
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Dimensions of Logistics:
Introduction
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Logistics has come a long way since the 1960s.
The big challenge is to manage the whole
logistics system in such a way that order
fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the individual
firm’s logistics system but also recognizing that
no logistics system operates in a vacuum.
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Figure 2-1
Contemporary Supply Chain Pipeline
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Figure 2-2: Logistics Costs as a
Percentage of GDP
1999
9.9
1998
10.1
1996
10.3
1995
10.4
1990
11.4
1985
12.3
1980
15.7
0
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10
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8
Logistics in the Economy:
A Macro Perspective
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As indicated in Figure 2-2, logistics costs as a
percentage of GDP have declined from 16
percent in 1980, to under 10 percent in 1999.
Early to mid-1970s saw the figure closer to 20
percent.
This reflects a serious improvement in the
efficiency of logistics systems.
Figure 2-3 shows a further breakdown of
logistics costs for 1999.
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Figure 2-3:
Total Logistics Costs --- 1999
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Figure 2-4:
Inventory Sales Ratio
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Logistics in the Economy:
A Macro Perspective
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As indicated in Figure 2-4, the Federal
Reserve measure of inventory to sales ratios
from 1991 to 1999 clearly indicate that
companies are getting better at managing
inventory.
Companies have been supporting larger
amounts of sales with decreasing amounts of
inventory.
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Logistics in the Economy:
A Macro Perspective
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The two largest cost categories in logistics
systems are transportation and inventory.
While we will look at this in Chapter 9, motor
carriers’ share of total freight expenditures is
$450 billion versus $99 billion for all other
carriers.
The most frequent trade-off in logistics is
between transportation and inventory cost.
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What is Logistics?
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Increased recognition through news media,
corporate-owned trailer promotions, and
television
Increased sensitivity to service quality
provided by logistics
Logistics definitions provided in Table 2-1 on
the following slide.
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Table 2-1:
Logistics Definitions
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What is Logistics?

Popular logistics terms:
 Logistics Management
 Business Logistics Management
 Integrated Logistics Management
 Materials Management
 Physical Distribution Management
 Marketing Logistics
 Industrial Logistics
 Distribution
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What is Logistics?:
21st Century View of Logistics
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Business Logistics – supply chain process that
plans, implements, and controls the efficient,
effective flow of goods, services, and related
information from the point of origin to the point
of use or consumption in order to meet
customer requirements.
Military Logistics – design and integration of all
aspects of support for the operational capacity
of the military forces, and their equipment to
ensure readiness, reliability, and efficiency.
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What is Logistics?:
21st Century View of Logistics
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Event Logistics – network of activities, facilities,
and personnel required to organize, schedule,
and deploy the resources for an event to take
place and to efficiently withdraw after the
event.
Service Logistics – acquisition, scheduling, and
management of the facilities/assets, personnel,
and materials to support and sustain a service
operation or business.
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What is Logistics?:
Value-Added Role of Logistics

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Most commonly referred to in terms of
economic utilities:
 Form utility (what)
 Place utility (where)
 Time utility (when)
 Possession utility (why)
Also referred to as the seven Rs --- Right
product, Right quantity, Right condition, Right
place, Right time, Right customer, and Right
cost.
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Figure 2-5 Fundamental Utility
Creation in the Economy
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Logistics in the Firm:
The Micro Dimension
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Logistics Interfaces with
Operations/Manufacturing
Logistics Interfaces with Marketing
Logistics Interfaces with Other Areas
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Logistics in the Firm: Logistics Interfaces
with Operations Manufacturing

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Length of production runs
 Balance economies of long production runs
against increased costs of high inventories.
Seasonal demand
 Acceptance of seasonal
inventory to balance
lead production times.
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Logistics in the Firm: Logistics Interfaces
with Operations/Manufacturing
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Supply-side interfaces
 Stocking adequate supplies to ensure
uninterrupted production now a logistics
function.
Protective packaging
 Principal purpose is to protect the product
from damage.
Foreign & third party alternatives
 Some logistics functions are being
outsourced.
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Logistics in the Firm:
The Micro Dimension

Logistics Interfaces with Marketing:
The Marketing Mix – Four Ps
 Price
 Product
 Promotion
 Place
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Logistics in the Firm:
Price


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Carrier pricing
 Generally, since the larger the shipment, the
cheaper the transportation rate, shipment sizes
should be tailored to the carrier’s vehicle capacity
where possible.
Matching schedules
 Quantity discounts should be tied to carrier
quantity discounts.
Volume relationships
 Volumes sold will affect inventory requirements.
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Management of Business Logistics, 7th Ed.
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Logistics in the Firm:
Product

Consumer packaging
 Generally, since the size, shape, weight and other
physical characteristics of the product impact on
its storage, transportation and handling, the
logistics managers should be included in any
decisions regarding these product traits.
 A minor correction in any of the above could
conceivably cost (or save) millions of dollars in
logistical costs.
 Logistics costs are not necessarily paramount, but
they need to be considered in the decision making
process.
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Logistics in the Firm:
Promotion

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Push versus pull
 The most important factor is that the logistics
division is aware of any changes in demand
patterns so that it can plan for any consequences.
 Pull strategies tend to be more erratic.
 Push strategies tend to more predictable.
Channel competition
 The more popular a product, the easier it is to
persuade channel members to promote your
product.
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Logistics in the Firm:
Place

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Wholesalers
 Generally, since wholesalers are combining
purchases for multiple retailers, the shipment sizes
tend to be larger and the number of transactions
that have to be processed are fewer, with the
result that logistics costs are smaller.
Retailers
 With the exception of very large retailers who act
more like wholesalers, smaller sales are the norm.
These generally cost more for transportation and
order processing.
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Logistics Interfaces with
Other Areas
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
Manufacturing and marketing are probably the two
most important internal, functional interfaces with
logistics.
Other important interfaces now include finance and
accounting.
 Logistics can have a major impact on return on
assets and return on investment.
 Logistics costs reported by cost systems measure
supply chain trade-offs and performance.
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Logistics Activities
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Transportation
Storage
Packaging
Materials handling
Order fulfillment
Forecasting
Chapter 2
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Production planning
Purchasing
Customer service
Site location
Other activities
Management of Business Logistics, 7th Ed.
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On the Line:
Toyota Distribution
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Moves more than 8 million parts and accessories every
month.
Computer modeling re-designed the 30 year old
distribution network.
Software looked first at Lexus Division and then at the
entire network.
Resulted in two DCs, one in California, another in
Kentucky, feeding nine smaller DCs located around the
country.
The new network both improved customer service and
lowered costs.
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Approaches to Analyzing Logistics
Systems: Materials Management v.
Physical Distribution

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Frequently the movement and storage of raw
materials is far different from the movement
and storage of finished goods.
Four different classifications of logistics systems
 Balanced system - e.g., consumer products
 Heavy inbound - e.g., aircraft, construction
 Heavy outbound - e.g., chemicals
 Reverse systems - e.g., returnable products
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Approaches to Analyzing Logistics
Systems
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Cost Centers
 Treating logistics activities as cost centers makes it
easier to study cost trade-offs between the centers.
(see Tables 2-2 and 2-3)
Nodes versus Links
 Nodes are spatial points (warehouses, plants, etc.);
 Links are the transportation network (rail, motor, air,
pipe and water). (see Figure 2-6)
Logistics Channel
 The network of intermediaries involved in the
logistics system. (see Figures 2-7, 2-8, and 2-9)
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Table 2-2 Analysis of Total Logistics Cost with
a Change to Higher Cost Mode of Transport
Cost Centers
Transportation
Rail
Motor
$ 3.00
$ 4.20
Inventory
5.00
3.75
Packaging
4.50
3.20
Warehousing
1.50
.75
Cost of Lost Sales
2.00
1.00
$ 15.00
$ 13.00
Total Cost
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Table 2-3 Analysis of Total Logistics Cost
with a Change to More Warehouses
Cost Centers
Transportation
Inventory
System 1
System 2
Three Warehouses
Five Warehouses
$
850,000
$
500,000
1,500,000
2,000,000
Warehousing
600,000
1,000,000
Cost of Lost Sales
350,000
100,000
$ 3,300,000
$ 3,600,000
Total Cost
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Figure 2-6 Nodes and Links in a
Logistics System
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Figure 2-7
A Simple Logistics Channel
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Figure 2-8
A Multi-Echelon Logistics Channel
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Figure 2-9
A Complex Logistics Channel
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Logistics and Systems Analysis

Cost Perspective
 Keep in mind that the most efficient
systems are not always comprised of each
system component operating at its lowest
possible cost.
 The critical concern is to have the entire
system operating at its lowest total cost.
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Logistics and Systems Analysis

Level of Optimality
 There are often constraints working which
result in sub-optimal outcomes.
 Additionally, logistics systems must work in
harmony with marketing, finance,
production, etc.--- this may also result in
sub-optimal logistics performance.
 See Figure 2-10 on next slide.
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Figure 2-10 Levels of Optimality
in Economic Environments
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Techniques of Logistics System
Analysis: Short-Run/Static Analysis
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This technique is illustrated in Table 2-4.
Comprised a matrix-like table which presents
each of the logistics and other relevant costs
for two or more alternative logistics systems.
The major downside to the model is that it
presents a solution which is not necessarily
the correct one at all possible volume levels.
Examine the data presented in Table 2-4.
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Management of Business Logistics, 7th Ed.
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Table 2-4 Static Analysis of C & B
Chemical Company (50,000 pounds of
output)
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Techniques of Logistics System
Analysis: Long-Run/Dynamic Analysis
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This technique is illustrated in Figure 2-11.
Comprised a graph of the fixed and variable
costs of at least two alternative logistics
systems.
The graph may have at least one indifference
point, but may have multiple points of
indifference.
Examine the data presented in Figure 2-11.
Chapter 2
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45
Figure 2-11
Dynamic Analysis
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Management of Business Logistics, 7th Ed.
46
Dynamic Analysis
System 1
Total Cost = Fixed Costs + Variable Cost/unit x number of units
y = $4200
+
0.0315x
System 2
Total Cost = Fixed Costs + Variable Cost/unit x number of units
y = $4800
+
0.0230x
Trade-off Point
System 1 Total Costs = System 2 Total Costs
$4200 + 0.0315x
=
$4800 + 0.0230x
0.0085x
=
$600
x
=
70,588 pounds
Chapter 2
Management of Business Logistics, 7th Ed.
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Logistics in the Firm: Factors Affecting
the Cost and Importance of Logistics
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Competitive Relationships
 Inventory/order cycle length – see Figure 2-12.
 Inventory/lost sales effect – see Figure 2-13.
 Transportation/lost sales effect - see Figure 2-14.
Product Relationships
 Product dollar value/logistics costs – see Figure 2-15.
 Weight density/logistics costs – see Figure 2-16.
 Susceptibility to loss & damage/logistics costs – see
Figure 2-17.
Spatial Relationships
 Examine Figure 2-18.
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Figure 2-12 The Relationship between
Required Inventory and Order Cycle
Length from a Customer Perspective
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Figure 2-13 The General Relationship of
the Cost of Lost Sales to Inventory Cost
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Figure 2-14
The General Relationship of the Cost of
Lost Sales to Transportation Cost
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Figure 2-15
The General Relationship of Product
Dollar Value to Various Logistics Costs
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Figure 2-16 The General Relationship of
Product Weight Density to Logistics Costs
Chapter 2
Management of Business Logistics, 7th Ed.
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Figure 2-17 The General Relationship of
Product Susceptibility to Loss and
Damage to Logistics Costs
Chapter 2
Management of Business Logistics, 7th Ed.
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Figure 2-18
Logistics and Spatial Relations
Chapter 2
Management of Business Logistics, 7th Ed.
55
Chapter 2:
Summary and Review Questions
Students should review their knowledge of the
chapter by checking out the Summary and Study
Questions for Chapter 2.
This is the last slide for Chapter 2
End of Chapter 2 Slides
Dimensions of Logistics