TRL2604 Summary of textbook and study guide in 2019 November
THIS INCLUDES TEXT FROM THE STUDY GUIDE WITH GRAPHS AND EQUATIONS AND A SUMMARY OF THE TEXTBOOK CONTENT REQUIRED FOR THE MODULE
Summary lectures Distribution Management, notes & learning goals
TRL4864 - Comprehensive Summaries of Texbook for Exam Prep 2020
Full summary Distribution Management (lecture slides, book chapters, articles) ordered per lecture
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TRL2604 - Integrated Logistics (TRL2604)
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TRL2604: Learning summary
Contents
Unit 1: Basic concepts and goal of logistics.....................................................................................................................6
Logistics and the supply chain.....................................................................................................................................6
The supply chain Revolution........................................................................................................................................6
Why integration creates value.....................................................................................................................................6
Generalized supply chain model..................................................................................................................................7
Logistics..................................................................................................................................................................... 73
Logistical competency...............................................................................................................................................73
The logistical mission / logistics value proposition....................................................................................................73
Service Benefits.....................................................................................................................................................73
Cost minimization..................................................................................................................................................74
Logistics value generation.....................................................................................................................................74
Logistical Trade-offs...................................................................................................................................................74
The nature of trade-offs........................................................................................................................................74
Inter-organisational trade-offs..............................................................................................................................74
Inter-functional (interdepartmental) trade-offs....................................................................................................75
Interactivity trade-offs...........................................................................................................................................75
Intra-activity trade-offs..........................................................................................................................................75
Unit 2: Basic Logistics activities (Network design, information and transport).............................................................77
Network design.........................................................................................................................................................77
Network Design.........................................................................................................................................................77
Facility Network Design.............................................................................................................................................77
The nature and role of facilities in the logistics network.......................................................................................77
The number of facilities.........................................................................................................................................78
The location of facilities.........................................................................................................................................79
Information............................................................................................................................................................... 80
Order processing...................................................................................................................................................80
Inventory...............................................................................................................................................................81
Transportation...........................................................................................................................................................81
Basic modes of transport.......................................................................................................................................82
Intermediaries in the transport system.................................................................................................................86
The selection of suitable transport........................................................................................................................86
Summary............................................................................................................................................................... 87
Unit 3: Basic Logistics activities (Inventory and Warehousing)......................................................................................88
Inventory................................................................................................................................................................... 88
Types of inventory.................................................................................................................................................88
, The purpose of inventory......................................................................................................................................88
Inventory carrying costs........................................................................................................................................90
Optimum inventory levels.....................................................................................................................................90
Selective deployment............................................................................................................................................93
Warehousing, materials handling and packaging......................................................................................................93
Warehousing Types of warehouses.......................................................................................................................94
Materials handling and packaging.........................................................................................................................96
Unit 4: Framework for integrating logistics operations.................................................................................................97
Integrated logistics....................................................................................................................................................97
Coordinating the components of logistics operations...........................................................................................97
Logistical operations..................................................................................................................................................98
Inventory flow.......................................................................................................................................................98
Information flow....................................................................................................................................................99
Operational Objectives............................................................................................................................................100
Why integration creates value.................................................................................................................................100
Traditional perspective = economic value...........................................................................................................100
Market value.......................................................................................................................................................100
Relevancy value...................................................................................................................................................100
Logistical integration objectives..............................................................................................................................101
Responsiveness...................................................................................................................................................101
Variance reduction..............................................................................................................................................101
Inventory reduction.............................................................................................................................................101
Shipment consolidation.......................................................................................................................................102
Quality................................................................................................................................................................. 102
Lifecycle support..................................................................................................................................................102
Warehouse requirements........................................................................................................................................102
Procurement drivers............................................................................................................................................102
Manufacturing drivers.........................................................................................................................................103
Customer relationship drivers.............................................................................................................................103
Warehouse justification.......................................................................................................................................104
Barriers to internal integration................................................................................................................................104
A shift in emphasis from function to process..........................................................................................................104
Process integration barriers.................................................................................................................................104
Summary................................................................................................................................................................. 105
Unit 5: Logistics Performance cycles...........................................................................................................................106
Logistics performance cycles as basis for integration..............................................................................................106
Supply chain synchronisation..................................................................................................................................106
, Performance cycle structure...............................................................................................................................107
Performance cycles within each logistics component.............................................................................................108
Managing operational uncertainty..........................................................................................................................110
Performance cycle uncertainty................................................................................................................................110
Summary................................................................................................................................................................. 111
Unit 6: Customer accommodation..............................................................................................................................113
The logistics / Marketing interface..........................................................................................................................113
Customer-focused marketing..................................................................................................................................114
The customer.......................................................................................................................................................114
Logistics and the marketing concept...................................................................................................................114
Transactional vs relationship marketing..............................................................................................................115
Supply chain service outputs...............................................................................................................................115
Customer service.....................................................................................................................................................116
Basic customer service........................................................................................................................................116
Availability...........................................................................................................................................................117
Operational performance....................................................................................................................................117
Service reliability.................................................................................................................................................118
The perfect order (zero defect)...........................................................................................................................118
Customer Satisfaction..............................................................................................................................................119
Customer expectations........................................................................................................................................119
A model of customer satisfaction........................................................................................................................119
Increasing customer expectations.......................................................................................................................121
Limitations of customer satisfaction....................................................................................................................121
Customer Success....................................................................................................................................................123
Achieving customer success................................................................................................................................123
Value added services...........................................................................................................................................124
Summary................................................................................................................................................................. 124
Unit 7: Customer service costs and efficiency.........................................................................................................125
Introduction.............................................................................................................................................................125
The Service level/cost relationship..........................................................................................................................125
Customer Service costs............................................................................................................................................126
The cost of lost sales................................................................................................................................................128
Trade-off between costs and benefits of customer service.....................................................................................128
CUSTOMER SERVICE EFFICIENCY.............................................................................................................................130
ABC analysis.........................................................................................................................................................130
Customer account profitability............................................................................................................................131
Summary................................................................................................................................................................... 85
, Unit 8: Logistics requirement planning......................................................................................................................87
WHAT IS LOGISTICS REQUIREMENT PLANNING (LRP)?..............................................................................................87
DEPENDENT AND INDEPENDENT DEMAND...............................................................................................................87
THE SCOPE OF LRP.....................................................................................................................................................87
Materials requirement planning (MRP).................................................................................................................88
Distribution requirements planning (DRP).............................................................................................................89
VARIABLES REQUIRED FOR IMPLEMENTING LRP.......................................................................................................89
PROCEDURE FOR IMPLEMENTING LRP......................................................................................................................90
ADVANTAGES OF LRP................................................................................................................................................90
Marketing benefits................................................................................................................................................91
Logistics benefits...................................................................................................................................................91
PRACTICAL APPLICATION OF LRP...............................................................................................................................91
Summary................................................................................................................................................................... 87
PART 3 EXTERNAL LOGISTICS INTEGRATION..................................................................................................................93
Unit 9: Supply Chain Integration................................................................................................................................93
INTRODUCTION.........................................................................................................................................................93
SUPPLY CHAIN COMPETITIVENESS............................................................................................................................93
Development of collaborative relationships..........................................................................................................93
RISK, POWER AND LEADERSHIP.................................................................................................................................93
Risk........................................................................................................................................................................ 94
Power.................................................................................................................................................................... 94
Leadership.............................................................................................................................................................94
SUPPLY CHAIN RELATIONSHIPS.................................................................................................................................94
Collaborative relationships and dependency.........................................................................................................96
Developing Trust....................................................................................................................................................97
Building trust in relationships................................................................................................................................97
SUPPLY CHAIN INTEGRATIVE FRAMEWORK..............................................................................................................97
Supply chain collaborative framework..................................................................................................................98
Summary................................................................................................................................................................. 100
Unit 10: Global Supply Chain Integration................................................................................................................101
INTRODUCTION.......................................................................................................................................................101
GLOBAL ECONOMIES...........................................................................................................................................101
GLOBAL SUPPLY CHAIN INTEGRATION....................................................................................................................101
Globalisation strategies.......................................................................................................................................101
Logistics in a global economy..............................................................................................................................101
Globalisation strategies.......................................................................................................................................102
MANAGING THE GLOBAL SUPPLY CHAIN.................................................................................................................104
, Performance cycle structure...............................................................................................................................105
Transportation.....................................................................................................................................................105
Operational considerations.................................................................................................................................105
Information system integration...........................................................................................................................106
Alliances..............................................................................................................................................................106
Unit 11: International Trade terms..........................................................................................................................108
INTRODUCTION.......................................................................................................................................................108
ORGANISATION OF INCOTERMS 2010.....................................................................................................................108
DESCRIPTION OF INCOTERMS 2010.........................................................................................................................109
EXW – ex works...................................................................................................................................................109
FCA – free carrier.................................................................................................................................................109
CPT – carriage paid to..........................................................................................................................................109
CIP – carriage and insurance paid to...................................................................................................................109
DAT – delivered at terminal.................................................................................................................................109
DAP – delivered at place......................................................................................................................................109
DDP – delivered duty paid...................................................................................................................................109
FAS – free alongside ship.....................................................................................................................................110
FOB – free on board............................................................................................................................................110
CFR – cost and freight..........................................................................................................................................110
CIF – cost, insurance and freight..........................................................................................................................110
NOTES ON INCOTERMS 2010...................................................................................................................................110
,Unit 1: Basic concepts and goal of logistics
Logistics and the supply chain
SCM – consists of firms collaborating to leverage strategic positioning and to improve operating efficiency
SCM
Encompasses the planning and management of all activities involved in sourcing procurement, conversion and all
logistics management activities; includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third party service providers and customers. SCM integrates supply and demand
management within and across companies
Supply chain - alignment of firms that bring products or services to the market; consists of the key business
processes that provide products, services and information which add value for customers and stakeholder
Logistics (CSCMP) - the process of planning, implementing and controlling procedures for the efficient and effective
transportation and storage of goods including services, and related information from the point of origin to the point
of consumption for the purpose of conforming to customer requirements; includes inbound, outbound, internal and
external movements
Logistics is a subset and occurs within the broader framework of supply chain
Logistics is the process that creates value but turning and positioning inventory and it is the combination of a firm's:
Order management
Inventory
Transportation
Materials handling
Packaging
Logistics is concerned with satisfying customer expectations by providing the right quantity at the right time and
place at the lowest total cost
The supply chain Revolution
Supply chain management:
consists of multiple firms collaborating to Leverage strategic positioning and to improve operating efficiency
For each firm, the supply chain relationship reflects a strategic choice
SC operations require managerial processes that span traditional functions and link suppliers across business
boundaries
Supply chain strategy - a channel and business organisational arrangement based on acknowledge dependency and
collaboration
Logistics
the work required to move and geographical position inventory
The process that creates value by timing and positioning inventory
Combination of a firm's order management, inventory, transportation, warehousing, materials handling and
packaging as integrated throughout the facility network
Integrated Logistics serve to link and synchronise overall the supply chain as a continuous process
Supply chain strategy establishes the operating framework within which logistics is performed
Why integration creates value
Customers have three perspectives of value:
1. Economic value - economy of scale in operations as the source of efficiency; economy of scale seeks to fully
utilise fixed assets to achieve the lowest total cost; the focus is efficiency of creation.
Consumer takeaway = high quality at low price
, 2. Market value - presenting attractive products at the right time and place to realise effectiveness; focus on
achieving economy of scope. Creation of multi merchant shopping malls and large-scale merchandising
Customer takeaway = convenient assortment and choice of products and services
3. Relevancy value - customisation of value-adding services in addition to basic product characteristics. The
right products and services are reflected by the market and positioned in a manner that creates customer
specific value. Converting ingredients into a ready-made meals
Customer takeaway = unique product or service bundle
Table 1.1 page 5
Generalized supply chain model
An integrated supply chain is Multi-firm collaboration within a framework of key resource flows and constraints
Supply chain structure and strategy results from efforts to operationally align and Enterprise with customers and
distributive and supplier networks
Ideally integrated from the initial material purchase to delivery of finished products and services
Value results from synergy among firms as a result of five critical flows:
Information Financial
Product Knowledge
Service
Logistics is the primary conduit of products and service flow
Each firm is involved in performing some or all aspects of overall Logistics
Figure 1.1 - integrated value creation process must be aligned and managed from material procurement to end
customer product or service delivery in order to achieve effectiveness, efficiency, relevancy and sustainability
Traditional perspective - loosely linked groups of independent businesses
High degree of mobility and change observable in typical arrangements and complexity to the supply chain
structure
Logistics
Logistics is about satisfying customer expectations by ensuring that the required quantity of a particular product
(whether in the form of raw materials, semi-finished products or finished products) is available at the place and
time required at the lowest total cost.
Logistics does not constitute a separate functional department in a business; it involves a number of processes or
activities that cut across various functional departments and even other participants in the supply chain.
What activities are necessary to move and position inventory throughout a supply chain?
Logistics involved in management of order processing, inventory, transportation and the combination of
warehousing, materials handling and packaging, all integrated throughout a network of facilities
The goal of Logistics: To support procurement, manufacturing and customer accommodation writing operational
requirements
Overall goal of logistics is to achieve a predetermined or target level of customer service at the lowest total cost
The challenge is to coordinate functional competency into an integrated operation focused on servicing customers
Logistical competency
Adds value by ensuring that the required quantity of a particular product is available at the place and time
required at the lowest total cost; creating logistic values costly
Firms with world-class logistical competency have a competitive advantage due to providing customers with
superior service
Leading performers use information technology capable of monitoring global logistical activity on a real-time basis
Technology identifies potential operation breakdowns and facilitates corrective action prior to service failure
Logistical competency - businesses level of performance with regard to Logistics; superior performance is essential
for business success and competitive advantage
To gain competitive advantage customer value needs to be created this depends on effective Logistics
The logistical mission / logistics value proposition
The logistical value proposition - service and cost minimization
Service Benefits
Key strategic issues how to outperform competitors in a cost-effective manner
Cost/benefit impact of logistical failure is directly related to the importance of the service to the end
customer
The more significant the service failure impact upon our customers’ business, the greater the priority
placed on an error-free logistical performance
Basic logistical performance - the level of service a firm provides all established customers measured in terms of
Inventory availability - probability of having inventory to consistently need customer material product
requirements; IT that facilitates system flexibility is providing new ways to achieve high availability for
customers without high capital investment in inventory
Operational performance - the time required to deliver a customer's order; involve delivery speed and
consistency; first achieve consistency and then improved delivery speed
Flexibility - ability to accommodate unusual and unexpected customer requests
Performance malfunction - concerned with the probability of logistical performance failure, logistical
competency can be measured in terms of recovery time
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, TRL2604/1
How a firm handles all aspects of customer requirements including service failure on a day in and day
out
Service reliability - the quality attributes of Logistics; the key is accurate measurement of availability and
operational performance
To achieve service reliability, essential to identify and implement inventory availability and operational
performance; management must be committed to continuous improvement
To improve the service performance - establish goals on a selective basis
Level of basic logistical service must be realistic
Inability to consistently meet an unrealistic service target will result in more problems
Cost minimization
Understanding total cost lead to examining how functional costs interrelated impact with each other
Impacts are known as cost to cost trade-offs
Critical need for developing total cost analysis and activity-based costing capabilities
Accounting practices service barriers to fully implementing total cost logistical Solutions
Logistics value generation
To achieve logistical leadership - matching operating competency and commitment to key customer
expectations and requirements
Customer commitment in an exacting cost framework; unique commitment of a firm to individual or
selected customer groups- logistics value proposition
Aim is to develop and implement an overall logistical competency that satisfies customer expectations at
realistic total cost expenditure
Well-designed logistical effort = high customer impact; controlling operational variance and minimising
inventory commitment
Formulation of Sound strategy requires a capability to estimate operating cost to achieve service levels
Leading firms = well-designed logistic system can help achieve competitive advantage
Total cost concept is that the minimisation of costs within each individual business function or logistics activity can
result in a higher total cost than could otherwise be achieved if the functions or activities were integrated
Logistical Trade-offs
The nature of trade-offs
DEFINITION
Total cost can be minimised by spending more on packaging which will facilitate handling.
Increase Aintrade-off
packagingis costs
simplyis atraded offbetween
balance against atwo
reduction in logistics
or more handlingfunctions
costs in order to achieve
to achieve a reduction in
total lowest
total costs.
cost. A trade-off occurs when an increased cost in one area is more than matched by a cost
reduction
Trade-offs in otheratareas,
can be affected thus resulting
the following in a lower total cost.
four levels
Inter-organisational trade-offs
Inter-organisational trade-offs occur mainly when intermediaries are used in the marketing channel. Such trade-
offs involve the selection of wholesalers and retailers in the marketing channel. For example, it may cost more to
make use of various wholesalers, but sales may increase, thus resulting in a better overall position.
Inter-organizational trade-offs involve selecting least total cost supply chains. These are mostly chains comprising
different institutions (intermediaries such as wholesalers and retailers or third-party logistics providers). What is
fundamentally important is to use the correct intermediaries.
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If no intermediaries were used, there would be
close contact with the marketplace
proper control over key areas such as customer (end-user) service policy
Advantages:
Intermediaries in the channel specialise in particular activities which may result in economies of specialisation
through the division of labour, for example, specialised sales staff.
An intermediary may also achieve economies of scale by means of high volume at high throughput levels.
The use of intermediaries results in a reduction in contact costs, which are the costs of the contacts that need to be
made between buyers and sellers in order to distribute a product.
Inter-functional (interdepartmental) trade-offs
Trade-offs between different management functions or departments; it may be necessary for some to forfeit or all
individual functional departments to operate suboptimally in order for the whole logistics system to minimise total
logistics costs
For example, the marketing manager may have to be prepared to accept a lower level of service or a narrower
product range; the production manager may have to be prepared to schedule shorter runs or to economies of
scale; and the transport manager may have to be prepared to make more frequent deliveries if this will contribute
to the efficiency of the total logistics system.
Interactivity trade-offs
Successful trade-offs among the various logistics activities constitute the most important factor contributing to
the achievement of lowest total cost. The most obvious trade-offs at this level are the following:
a. Warehouse cost/transport cost trade-offs
Example: consider a distribution system with ten regional depots. Such a system will have high warehouse and
stockholding costs compared with a system with only one central warehouse, but the savings on long-haul
transport costs and the reduction of stock-outs may more than compensate for the additional costs involved in the
ten-depot system. (Countrywide, delivery costs from one central warehouse to individual retailers or customers
involves transporting many partial loads over long distances. With more depots, consignments to individual
customers can be consolidated for delivery at the depot. Local delivery in partial loads is then made over shorter
distances.) An increase in warehouse and inventory carrying costs is traded off against a reduction in transport
and stock-out costs in order to achieve an overall reduction in total costs.
b. Transport cost/inventory cost trade-offs
Examined from the point of view of its effect upon other logistics activities. The transport mode decision will affect
the level of inventory in the system, because the more rapid the mode, the less the in-transit inventory will be.
Rapid replenishment will reduce the need to hold stock at distant markets. The more reliable the transport mode,
the smaller the need will be for high safety stock levels. Faster and more reliable transport results in higher
transport costs.
Intra-activity trade-offs
Intra-activity trade-offs occur within a particular logistics activity. The following intra-activity trade-offs are the
most common:
a. Trade-offs within a warehouse
Materials handling within a warehouse can be done manually or mechanically, or can be automated. The high
capital costs associated with automated warehouses should be traded off against the human resources cost of
manual handling.
b. Inventory trade-offs
The advantages of ordering in large quantities (e.g. discounts on the purchase price and on transport costs) should
be traded off against the costs of carrying stock (e.g. the interest which could be earned on money tied up in stock
and the cost of warehouse space).
c. Trade-offs with regard to transport
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