CHAPTER LOGISTICS AND THE SUPPLY CHAIN l ECO G I 12 Ir Special logistics staffs handle the mO cIllent of items and displays for trade shows and special events This sleek Mercedes racer is being loaded aboard a KLM Boeing 747 Photo KLM Ro a Dutch Airline Photo Archi es Reproduced with permission P f 2 CHAPTER 1 Logistics and the Supply Chain 3 Key Terms Channel intermediaries Cost trade offs Economic utility FOB destination pricing Phantom freight Place utility Possession utility Postponement FOB origin pricing Power retailer Form utility Freight absorption Reverse logistics Stock keeping units SKUs Inbound logistics Landed costs Logistics Mass logistics Materials management Stock outs Systems approach Tailored logistics Time utility Total cost approach Learning Objectives To learn the definition of logistics To understand the economic importance of logistics To learn of recent events and their int1uences on logistics practices To gain an understanding of logistics practices within a firm To learn different pricing policies To know about logistics careers ECONOMIC IMPACTS OF LOGISTICS At this point you may have limited awareness of and knowledge about logistics the subject matter of this textbook However if that is the case you re really not very different from lots of other people who inhabit this planet and it might come as a surprise to you that logistics tends to have significant economic impacts From a macroeconomic perspective Table 1 1 summa rizes U S logistics costs in relation to gross domestic product GOP for five year time periods between 1960 and 2005 Note that logistics as a percentage of GOP has declined from approxi mately 15 percent in 1960 to less than 10 percent in 2005 and that annual aggregate logistics costs now approach 1 2 trillion Although absolute and relative logistics costs in relation to GOP vary from country to country logistics expenditures in China are estimated to be about 19 percent llogistics is most definitely an important component in any country s economy Continuing with a macro perspective logistics can also play an important role in a nation s economic growth and development Hannigan and Mangan pointed out that logistics particu larly improvements in transportation efficiency played a key role in the explosive growth of Ireland s economy in the mid and late 1990s they had a GOP increase of 62 percent in this period According to Hannigan and Mangan future growth of Ireland s economy will not be j Paul Page The China Effect Traffic World May 8 2006 19 21 4 PART I Overview of Logistics TABLE 1 1 h lr tel The Cost of the Business Logistics System in Relation to Gross Domestic Product GOP Jr Plat In Billion J t 1ft Year 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Inventon Carrying Costs 31 38 56 97 220 227 283 302 377 393 Transporfation Costs Administrative Costs 44 3 4 6 9 17 64 91 116 214 274 351 441 590 744 20 25 30 39 46 Jt si Total U S Logistic 5 Cost 78 106 153 222 451 521 659 773 1 006 1 183 Logistics As a Percentage ojGDP t1 CXC t fc J il Ch l h n th Jlflt ft n 14 7 14 7 14 7 13 5 16 1 12 4 11 4 10 4 10 1 9 5 n qu 11 J Ill 1 it nnel Jrlin n fc Jn a t IJt n rJn1d tl Sources Rosalyn Wilson and Robert Delaney Twelfth Annual Stale of Logistics Report 2001 Rosalyn Wilson Seventeenth Annual State of Logistics Report 2006 LOGISTICS possible without improvements to its logistical capabilities 2 In a similar fashion both the Chinese government and the private sector recognize that as China s labor cost advantage shifts to other countries logistics efficiency becomes an essential component to fueling an econ omy that has been expanding at between 8 and 10 percent per year 3 Apart from the previous examples of macro level economic impacts the economic impacts of logistics can affect individual consumers such as you These impacts can be illustrated through the concept of economic utility which is the value or usefulness of a product in fulfill ing customer needs or wants The four general types of economic utility are possession form time and place Logistics clearly contributes to time and place utilities Possession utility refers to the value or usefulness that comes from a customer being able to take possession of a product Possession utility can be intluenced by the payment terms asso ciated with a product Credit and debit cards for example facilitate possession utility by allow ing the customer to purchase products without having to produce cash or a cash equivalent Likewise automotive leases allow customers to take possession of a more desirable model than would be possible with conventional automotive loans Form utility refers to a product s being in a form that 1 can be used by the customer and 2 is of value to the customer Although form utility has generally been associated with pro duction and manufacturing logistics can also contribute to form utility For example to achieve production economies i e lower cost per unit a soft drink company may produce thousands of cases of a certain type of soft drink e g diet cola You re not likely to purchase diet cola by the thousands of cases unless you re having a really big social event but rather in smaller lot sizes such as a six or twelve pack Through allocation which will be discussed more fully in tha Jciinc urrt I ti s r11t lnmg i but afe Busl Dist IndL Logi Logi tat Ph SUPI In essen ir 1m a p Alth rt rspect r H1ng a J fines hcreas ill entor total cos 2Kevin Hannigan and John Mangan The Role of Logistics and Supply Chain Management in Determining the Competitiveness of a Peripheral Economy Irish farketing Ret iel1 14 no 1 2001 35 42 Peter Tirschwell In China Full Speed Ahead JOllrnal of Commerce April 17 2006 38 lation s that bec ft Spcct t CHAPTER 1 Logistics and the Supply Chain 5 Chapter 2 logistics can break the thousands of cases of diet cola into the smaller quantities that are desired by customers Place utility refers to having products available where they are needed by customers prod ucts are moved from points of lesser value to points of greater value Continuing with the diet cola example place utility is increased by moving the soda from a point of lesser value e g stored in a warehouse to a point of greater value e g on a supermarket shelf Closely related to place utility is time utility which refers to having products available when they are needed by customers It s important to recognize that different products have different sensitivities to time three day late delivery of
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