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

07/06/10 1
By :
Prof. Amit Kumar

07/06/10 2
“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.”
IILM-GSM
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
IILM-GSM
International Trade Logistics

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IILM-GSM
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
IILM-GSM

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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
IILM-GSM

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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
IILM-GSM
Customer Satisfaction
Cost Logistics
Warehousing
Inventory
Control
Material
handling
Logistical
Packaging
Information
flow
Order
Processing
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
IILM-GSM

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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
IILM-GSM

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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
IILM-GSM

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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
IILM-GSM

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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
IILM-GSM

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Who Stands Where in Logistics Costs
The logistics costs as a percentage of GDP of various countries
are shown:
Scope of Logistics
IILM-GSM
Country
Logistics 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
IILM-GSM
Country
Logistics 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
IILM-GSM

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Logic in Logistics for 30-Minutes Pizza
IILM-GSM
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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IILM-GSM
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.
Logic in Logistics for 30-Minutes Pizza

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IILM-GSM
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.
Twenty-Four Hour ATM

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IILM-GSM
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.
Twenty-Four Hour ATM

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IILM-GSM
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.
Dabbawalas of Mumbai

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IILM-GSM
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.
Dabbawalas of Mumbai

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IILM-GSM
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.
Indian Postal services

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IILM-GSM
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.
Indian Postal services

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IILM-GSM
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.
Gulf War in 1991

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IILM-GSM
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.
Gulf War in 1991

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IILM-GSM
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.
Public Distribution System

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IILM-GSM
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.
Public 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
IILM-GSM
Logistics
Mix
Warehousing
Inventory
Control
Packaging
Information
flow
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
IILM-GSM

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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
IILM-GSM

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Value Delivery Process
IILM-GSM

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Customer Value Chain
IILM-GSM

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Customer Value Chain
IILM-GSM
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
IILM-GSM

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Distribution of Logistics Cost
IILM-GSM
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
IILM-GSM
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.
IILM-GSM
Internationalization of Firm’s Value Chain
Stages 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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

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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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

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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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

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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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

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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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

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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.
IILM-GSM
R&D
Procurement
(Sourcing)
Services

IILM-GSM
Logistics Functions
Warehousing
Inventory
Control
Material
Handling & Storage
Logistical
Packaging
Information
flow
Order
Processing
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
IILM-GSM

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
IILM-GSM

• 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
IILM-GSM

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
IILM-GSM

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
IILM-GSM

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Logistics Future
IILM-GSM
• 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.

07/05/10 52
Logistics Future
IILM-GSM
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
IILM-GSM
GCMMF (AMUL): Managing Logistics to
Align Customer Demands

IILM-GSM
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

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

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