Itl lecture-02 to 04 (logistics-at the center of world trade)

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By :

Prof. Amit Kumar

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“Logistics has advanced from warehousing and

transportation to boardrooms of the successful leading

companies across the world. Due to increasing

importance of business logistics, it becomes necessary

for the student pursuing management education from

IILM- Graduate School of Management, to understand

logistics, its basic framework and practical utility.”

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Importance of this course

International Trade Logistics

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Course: International Trade Logistics

1. Logistics - At the Centre of World Trade

2. Supply Chain Management

3. Warehousing: A Role Beyond Storage

4. Material Handling & Storage System

5. Inventory Management

6. Transportation: Backbone of Logistics

7. Logistics Packaging

8. Logistics Information System

9. Global Logistics & Outsourcing

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International Trade Logistics

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International Trade Logistics Logistics: At the Centre of World Trade

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Learning Outcomes

After learning this chapter, one should be able to understand:

• Concepts, scope and objectives of logistics• Logistics mix (logistics components)• Present and future perspective of logistics• Role of logistics in customer value delivery chain

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Contents

• Cost Vs Customer Satisfaction• A Paradigm Shift• Logistics Defined• Scope of Logistics• Pervasiveness of Logistics• Logistics- A System Concept• Customer Value Chain• Logistics Functions• Strategic Order Fulfillment• Logistics Future• Case Study: AMUL- Managing Logistics to Align Customer Demands

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Logistics has helped many successful companies around the world to transform cost proposition into a

value proposition.

Cost Vs Customer Satisfaction

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Customer Satisfaction

Cost Logistics

Warehousing

InventoryControl

Materialhandling

Logistical Packaging

Informationflow

OrderProcessing

Shipping/Transportation

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• Several companies are making a paradigm shift by looking at logistics as an opportunity rather than as a cost centre.

• They are leveraging logistics to improve the service level to the customers, to accelerate the speed of launching new products, and to enter new markets faster than before within and beyond the national boundaries.

“…in its relationship to strategy, logistics assumes the character of a dynamic force without which strategic conception is simply a paper plan.”

-Theo Vogel sang, US Navy

Cost Vs Customer Satisfaction

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• The word logistics has its origin in the French verb loger to lodge or to quarter. Also, Latin word logisticus, meaning the science of computing and calculating.

Its original use was to describe the science of movement, supplying & maintenance of military forces in the field.

US army officially used this word after WW-II.

• Today logistics has acquired a wider meaning and is used in business to refer to movement of raw materials from suppliers to the manufacturer and finally, the movement of finished goods to the consumers.

Introduction: Logistics

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“Planning, implementing, and controlling the physical flows of materials and finished goods from point of origin to point of use to meet the customer’s need at a profit”.

- Philip Kotler

“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 customers’ requirements”.

- American Council of Logistics Management

Logistics Defined

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In the new millennium, • Globalization is making national economies more and more

integrated into the global economy

• World trade is expanding at an exponential rate

• Technologies are advancing & becoming an integrating force

• Customers are demanding value for the money

• Marketers are experiencing competitive pressure, and

• Businesses are struggling for growth, but also for survival.

This has forced organizations around the world to reevaluate their business processes and the way they deliver the

products and services to their customers.

A Paradigm Shift

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“The ultimate objective of a logistics function is to support corporate goals by delivering products to the consumer at the time and

place of his choice. However, the objective must be balanced against the cost of

providing service”.

Logistics Defined

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Who Stands Where in Logistics CostsThe logistics costs as a percentage of GDP of various countries

are shown:

Scope of Logistics

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CountryLogistics cost/

GDP (in percent)Share of 3P in

overall logistics (in percent)

China, India 13-15 <10

US 9.9 57

Europe 10 30-40

Japan 11.4 80

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Who Stands Where in Logistics Costs• It costs nearly USD 150 billion to move material from one

user to another in India. Country’s public distribution system needs logistical support to deliver the goods to right place at right time for the lowest possible cost.

Scope of Logistics

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CountryLogistics cost/

GDP (in percent)Share of 3P in

overall logistics (in percent)

China, India 13-15 <10

US 9.9 57

Europe 10 30-40

Japan 11.4 80

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Pervasiveness of Logistics

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Pervasiveness of LogisticsLogic in Logistics for 30-Minutes Pizza

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Ideally the time taken for registering the order should be one minute. After that the pizza goes to the guy in the

‘make line’. He takes two minutes, and then oven time is five minutes. When the pizza comes out of the oven it is

inspected. One minute goes into quality check and packing. Another minute goes in checking the route and confirming

the order one last time.

The moment he is leaving, the delivery boy shouts the out-of-the-door time, which is normally between

10 to 12 minutes. •.

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Then everybody yells out ‘drive safe’. When he returns he punches the time in. At the end of the day the average delivery time for all his order is checked. This helps the

manager figure out which orders were not delivered in time. The next day, the store manager calls each one of those

whose orders got delayed and apologizes.

The essence is process sequencing, just-in-time inventory availability, and time management for the success in this

service operations logistics.

Pervasiveness of LogisticsLogic in Logistics for 30-Minutes Pizza

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Foreign banks operating in India were the pioneers in ATMs in India. However, the lead taken by ICICI,HDFC, and the Citi Bank gave the face-lift to the ATM concept.

The success of ATMs depend on the effectiveness of the networking. The logistics supply chain for the currency

notes needs to be very efficient so as to ensure the availability of the currency notes at the stroke of a button.

Pervasiveness of LogisticsTwenty-Four Hour ATM

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Other logistics aspect is the information on the credit limits available to the customer at any point of cash

withdrawal.

Data warehousing and data mining with automatic updating for real-time information on credit worthiness are

the other essential support systems required for processing the customer request for cash withdrawal.

Pervasiveness of LogisticsTwenty-Four Hour ATM

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Dabbawalas of Mumbai offer a reliable foolproof logistical system of delivering lunch boxes to over 200,000 office employees everyday without mix up of

having the wrong Tiffin going to the wrong office or arriving late, irrespective of conditions such as rains, strikes and

scorching heat.

The dabbas are collected from the houses and put in Tiffin racks at a network of 96 railway stations all over

Mumbai to load into the train for further movement towards delivery points.

Pervasiveness of LogisticsDabbawalas of Mumbai

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They use color code system on the dabbas to identify the collection and delivery points. After the lunch hour, the system operates in reverse direction, again displaying

accuracy with collection and quality of deliver close to Six Sigma.

With this logistics system, 400,000 transactions are done daily with the precision

of Six Sigma accuracy.

Pervasiveness of LogisticsDabbawalas of Mumbai

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Indian Postal Service is one of the largest logistics networks in the world that delivers the letters in the most

cost-effective way.

The Indian Postal Service operates through a network of 1,52,781 post offices covering 6,09,030 villages, towns and

cities across the country, delivering 43 million letters every day.

Pervasiveness of LogisticsIndian Postal services

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They use all transportation modes available in India for movement of postal cargo.

The collection of letters from 542,781 letter boxes, followed by sorting, moving, unpacking and again

sorting for final delivery is a mammoth logistical task that they have performed cost effectively for the past one

and half centuries.

Pervasiveness of LogisticsIndian Postal services

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After WW-II, the Gulf War was the largest military operation, lasting for four days. The planning process of logistics operations was initiated many months before

the actual war started.

It involved the movement of over 1,25,000 ground troops to defend the area, stretching to 175 km long and 300 km deep in the Saudi Arabian desert. Around 500 tactical cargo trucks and 200 wheeled vehicles moved into place

within the short time frame of two weeks.

Pervasiveness of LogisticsGulf War in 1991

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The ammunition of 35,000 tonnes, fuel of 5.6 million gallons, rations of 2 million meals, and drinking water of 1 million gallons were made available at the appropriate

time during the war operations.

Entire logistics operations were based on information flow, which was based on excellent communication connectivity across the supply chain using the latest technology. However, efficiency and effectiveness of logistics operations contributed greatly to the

success of the winners.

Pervasiveness of LogisticsGulf War in 1991

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Food Corporation of India (FCI), a government undertaking, is handling the massive logistics operations of the

procurement, storage and distribution of food grains throughout the country.

FCI moves around 22 million tonnes of food grains over the distance of 1500 km per annum. On an average, 400,000

bags are transported through rail, road and inland water from the point of production to point of consumption

for distribution across 4,50,00 fair price shops spread across the country.

Pervasiveness of LogisticsPublic Distribution System

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On a average, FCI is storing over 23 million tonnes of grains in 1700 warehouses, which is near the consumption centers at various locations in the

country.

Pervasiveness of LogisticsPublic Distribution System

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• The concept of logistics is based on the system approach. Logistics recognizes that all the activities of material movement across the business process are interdependent and need close coordination.

• These activities are to be managed as a system and not as functional silos. The functional areas of logistics, termed ‘Logistics Mix’ by Martin Christopher, consist of:

Logistics- A System Concept

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Logistics Mix

Warehousing

InventoryControl

Packaging

Informationflow

Transportation

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Information flow• Order registration• Order checking and editing• Order processing• coordination

Warehousing• Material storage• Load unitizing and material handling• Site selection and network planning• Order picking and filling• Dispatch documentation


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Inventory Control• Material requirement planning

• Inventory level decisions for customer service objectives

Packaging• For handling and damage prevention

• For communication

Transportation• Route planning

• Mode selection

• Vehicle scheduling


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Value Delivery Process

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Customer Value Chain

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Customer Value Chain

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Logistics delivers value to customer through three phases:

1. Inbound Logistics• Operations preceding the manufacturing

• Movement of materials and components from supplier

2. Process Logistics• Operations directly related to processing

• Storage and movement of raw materials and components within the manufacturing premises

• Inventory management of stored materials and in-process goods is part of process logistics

3. Outbound Logistics• Warehousing, transportation and inventory management of

finished products.

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Value Chain of Gems & Jewellery Sector

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Value Chain of IKEA

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Distribution of Logistics Cost

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Logistics cost break-up in the above three categories shows a larger percentage in outbound logistics and transportation

covers the largest proportion.

Stages Cost items Percentage

Inbound Logistics Transportation 12.0

Storage 8.0

Inventory 7.0

Process Logistics Transportation 2.0

Storage 5.0

Outbound Logistics Transportation 33.0

Storage 15.5

Inventory 6.5

Order Processing 10.0

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Distribution of Logistics Cost

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The total logistics cost as percentage of the sales differs

with product categories.• For low unit value mass distributed products, the logistics

cost may be 30-40 percent of the sales value, which in the case of high value engineering items may not exceed 5-8 percent.

• With proper systems and controls, the logistical cost, which will be ultimately loaded on the product and borne by the customer, can be reduced.

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Each value-adding activity is subject to internationalization; that is, it can be performed abroad instead of at home.

The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and

production or to gain closer access to customers.

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Internationalization of Firm’s Value ChainStages in the Firm’s Value Chain

R&D Procurement(Sourcing)

Manufacturing Marketing Distribution Sales &Services


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The pharmaceutical firm Pfizer conducts R&D in Singapore, Japan and other countries to gain access to scientific talent

or collaborate with local partner firms.

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Office furniture manufacturer Steelcase sources low-cost parts from suppliers in China and Mexico.

Dell has business processes such as data entry, call centers and payroll processing performed in India.

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Genzyme Crop. does much of the manufacturing and testing of its surgical and diagnostic products in Germany,

Switzerland and the UK.

Renault produces cars via low-cost factories in eastern Europe.

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BMW and Honda locate marketing subsidiaries in the US to more effectively target their vehicles to the huge US market.

Carrefour and Barclays Bank establish worldwide networks of stores and offices to be near their customers.

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Wolverine World Wide, marketers of popular shoe brands ( e.g. Hush Puppies, Bates), contracts with independent

retail stores abroad to reach its customers.

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Direct sales company such as Amway and Avon employ their own independent sales office in China, Mexico and

elsewhere, in order to reach end-users.

Toyota maintains sales & customer service operations abroad in order to meet customer requirements more

effectively.

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Logistics Functions


Warehousing

InventoryControl

MaterialHandling & Storage

Logistical Packaging

Informationflow

OrderProcessing

Transportation

Order processing system is the nerve of the logistic system since it sets the logistic process in motion.

Order Processing

1. Order

Placement

2. Order

Received

6. Order

Delivery

5. Order

Shipped

3. Order

Processed

4. Order

Completion

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Order fulfillment is in the most general sense the complete process from point of sales inquiry to delivery of a

product to the customer. In the broader sense it refers to the way firms respond to customer orders.

The first research towards defining order fulfillment strategies was published by Mather (1988) and his

discussion of the P:D ratio.

Order Fulfillment

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• P is defined as the production lead-time, i.e. how long it takes to manufacture a product

• D is the demand lead-time i.e. how long customers are willing to wait for the order to

be completed.

Based on comparing P and D, a firm has several basic strategic order fulfillment options.

Order Fulfillment

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1. Engineer-to-Order (ETO) - (D>>P) Here, the product is designed and built to customer specifications; this approach is most common for large construction projects and one-off products, such as Formula 1 cars

2. Build-to-Order (BTO); syn: Make-to-Order (MTO) - (D>P) Here, the product is based on a standard design, but component production and manufacture of the final product is linked to the order placed by the final customer's specifications; this strategy is typical for high-end motor vehicles and aircraft

3. Assemble-to-Order (ATO) - (D<P) Here, the product is built to customer specifications from a stock of existing components. This assumes a modular product architecture that allows for the final product to be configured in this way; a typical example for this approach is Dell's approach to customizing its computers.

Strategic Order Fulfillment

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4. Make-to-Stock (MTS); syn: Build-to-Forecast (BTF) - (D=0) Here, the product is built against a sales forecast, and sold to the customer from finished goods stock; this approach is common in the grocery and retail sectors.

5. Digital Copy (DC) - (D=0, P=0) Where products are digital assets and inventory is maintained with a single digital master. Copies are created on-demand, downloaded and saved on customers' storage devices.

Strategic Order Fulfillment

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Logistics Future

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• Today, competition has shifted from product to supply chains. The efficiency and effectiveness in material and information movement are possible only with integrated logistics operations.

• At a macro level, growth of a country’s economy depends on the availability of an excellent logistics infrastructure. The air links and port terminal facilities are equally important for boosting export trade.

• Material movement need to be speedy, reliable, and consistent in a cross-border business exchange process.

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Logistics Future

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The future of logistics in India is very bright provided the issues such as abolition of octroi levy, rationalization

of customs formalities, privatization of ports, improvement in road and rail infrastructure are taken

care of through government initiatives with proper policy formulations.

With implementation of WTO directives, logistics services will be in great demand in future.

Case Study

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GCMMF (AMUL): Managing Logistics to Align Customer Demands


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1. Explain the major issues in logistics of milk collection.

2. How GCMMF is adding value in its supply chain process through logistics activities?

3. What is ‘Milk Run’ and how it is organized?

4. Discuss the role of IT in the success of logistics activities of GCMMF.

Review Questions:


GCMMF (AMUL): Managing Logistics to Align Customer Demands

Documents

Itl lecture-02 to 04 (logistics-at the center of world trade)