Introduction to Logistics Systems Management
Chapter 1 - Introducing logistics
1.1 Definition of logistics
• Logistics: the discipline that studies the functional activities determining the flow of
materials (and of the relative information) in a company, from their origin at the suppliers up
to delivery of the finished products to the customers and to the post-sales service.
1.2 Logistics systems
• From the point of companies, logistics is seen as a
system, which includes not only all the functional
activities determining the flow of materials and
information, but also the infrastructures, means,
equipment and resources that are indispensable to the
execution of these activities.
• A logistics system is made up of facilities, where one or
more functional activities are carried out.
• At each facility the flow of materials is temporarily
interrupted, to change their physical-chemical composition, ownership or appearance.
• Each logistic activity carried out involves costs, which add up as it draws neared the facilities
closest to the final customer. This added value can be spatial (following e.g. distribution
activities) or temporal (owing to storage activities).
• Representation of a logistics system by a directed graph.
• Supply logistics is carried out before the production plants
and consists of the management of raw materials,
materials and component parts supply as a function of the
company’s production plan.
• Internal logistics is carried out in the production plants and consists in receiving and storing
materials, in picking them up from the warehouse to feed the production lines and in
successively moving the semi-finished goods up to packaging and storing the finished
products.
• Distribution logistics is carried out after the production plants and before the market. They
supply the sales points or the customers.
• The supply logistics and the distribution logistics are collectively called external logistics.
• Storage and distribution of the finished products are the primary logistics activities. Logistics
activities can be conducted by the company itself or can be entrusted to a third party (3PL or
Third Party Logistics).
• In the logistics systems of the MTO-type (Make to Order), customers’ orders influence the
production plan and the latter determines the demand for materials and components of the
processing and assembly plants.
• In MTS-type (Make to Stock) logistics systems, market information (demand recorded in the
past, results of possible market surveys, etc.) is used to forecast the sales and therefore
affects the mode of distribution, as well as the production and supply plan.
, • Representation of a logistics network
- Arc: an existing information flow
between a pair of facilities.
• When the logistics system becomes more
complex, it is convenient to group the
products into classes of different importance.
• ABC classification: allows the goods to be
subdivided into three classes on the basis of the value of the products.
- Class A is made up of the set of products achieving a corresponding high percentage (e.g.
80%) of the overall annual revenue
- Class B is made up of the set of articles associated with the following 15% of the revenue
- Class C is made up of the remaining articles
• 80-20 principle/ Pareto principle: 20% of the population possessed 80% of the wealth.
1.3 Reverse logistics
• Reverse logistics is the sector of logistics dealing
with products flows (unsold items or returns) from
their final destination to the initial producer, or to a
facility dedicated to their treatment.
1.4 Integrated logistics
• Integrated logistics: the coordinated management,
according to a systemic vision, of the logistics
activities of different companies involved in the
management of the materials and information flows, with the aim of maximizing the overall
profitability. Can be realized in two alternative forms:
- Efficiency approach: relies on intelligent relations, that is, on the stipulation of
contracts of a strictly operative nature that do not modify the company’s own strategies
but tend to speed up exchanges with the partners and lead to a reduction of waste and
of activities that do not provide an added value.
- Differentiation approach: company tries to forge exclusive alliances with the partners,
thus generating unique and privileged relationships that are not replicable by
competitors and generate an added value with respect to the competition.
1.5 Objectives of logistics
• The objectives pursued in logistics can be characterized by three variables: cost, profits and
service level.
• Costs: are the financial resources consumed by the company when carrying out these
activities. They are divided into fixed and variable costs.
• Profits: logistics activities affect company profits, even though, contrary to costs, the impact
of logistics operations on sales is difficult to quantify, so the sole objective of profit
maximization is not very practical from the point of view of logistics.
• Service level: encompasses the overall degree of customer satisfaction and depends on
numerous factors (indicated collectively as marketing mix), connected to the product
characteristics, price, promotional offers and mode of distribution. Possible to quantify.
• The maximization of profit is obtained for high (but less than maximum) values of service
level.
• Order-cycle time: the time interval from the issuing of an order (or request of service) to the
delivery of the product (or completion of the service). The main logistical components are
the order processing time, the availability of the products in the warehouse, the assembly
time of the products making up the order and the shipping time.
, • The coefficient of variation, which is defined as the ratio of the standard deviation and mean
of the order-cycle time, can be used as a measure of the reliability of the service offered to
the customers. The lower the value of this index, the greater the reliability.
1.6 Management of the logistics system
• Planning: taking the best decisions possible, according to the predetermined objectives of
the logistics system. Considers the following decision-making areas:
- Forecasting: the process of estimating the uncertain parameters that characterize the
logistics system.
- Location: the activity by which the optimal location of the facilities is determined, both
in the planning phase of a logistics system and in the reorganization of an existing one.
- Supply: concerns all the logistic activities relative to the purchasing of raw materials,
semi-finished goods or supply services.
- Storage and distribution: decision-making areas for which logistics activities are of
primary importance.
• Logistics planning can be organized at three different decision-making levels:
- Strategic decisions(long-term choices): have a long-term effect on the logistics system
and involve major financial investments. Generally based on forecasts relative to
aggregated data.
- Tactical decisions(medium-term choices): refer to the use of available resources and are
usually based on forecasts. Carried out with an annual, seasonal or monthly frequency.
- Operational decisions(short-term choices): concern the definition of weekly or daily
work plans for the staff and for the material resources. Use data from the surrounding
environment and the results of forecasts.
• Organizing: organizing the human resources directly involved in logistics activities within a
company organizational chart, so to attain the company’s objectives, effectively and
efficiently.
• Control: measuring the performances of the logistics system according to the qualitative and
quantitative standards requested by the company management, and possibly initiate
corrective actions when the results are not in line with the objectives.
- Planning, organizing and control occur in sequence.
• Logistics in a company is a primary activity which can be illustrated by adopting a traditional
mode of presentation of organizational structures: functional, divisional and matricial.
• Functional structure: based on principles of work
subdivisions and specializations. Similar activities,
requiring analogous skills and the same kind of
resources, are grouped within functions. A function is
associated to a department, headed by a director.
- The management level deals with strategic
decisions, tactical and operational decisions are
delegated to functional areas.
- Advantage: efficient use of the resources
available and in the simplicity of the hierarchical
control and communication within the functional areas.
- Disadvantage: interdependence among work flows is not sufficiently taken into
consideration, lack of coordination can occur because of divergence of interests.
- Incapable of tacking production diversification or increased turbulence in the outside
environment.
