ISL455U-SUPPLY CHAIN MANAGEMENT
Chapter 3: Logistics and Transportation
Logistics
Moving soldiers to battle fields and ensuring the adequate supply of food, ammunition and housing at the battle field were crucial military requirements that initiated the logistics. It is believed that the word “Logistics” has roots from ancient Greek with a meaning of “science of computation” and experts on computing military requirements were named “Logistikos” by ancient Greeks (Farahani et al., 2011, p. 3). Also, it is important to note that the Greek word “lógos” means order and French word “loger” means allocate (Ghiani et al., 2013, p.1).
What is Logistics?
Several definitions of logistics are available. Chartered Institute of Logistics and Transport in the United Kingdom (CILT-UK) defines logistics as five rights. According to CILT-UK, “logistics is the process of ensuring that goods or a service is:
• In the right place • At the right time • In the right quantity • At the right quality • At the right price” (CILT-UK, 2020)
Council of Supply Chain Management Professionals (CSCMP) defines logistics as the “part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements” (CSCMP, 2020). The definition of CSCMP requires a detailed discussion:
• First, logistics is defined as a “part of supply chain management” (SCM). • Logistics “plans, implements and controls”. Planning and implementing are both important. • Logistics should be both efficient and effective. Efficiency is doing the job right and effectiveness is doing the right job (Drucker, 1963). • From a traditional point of view, logistics deals with the flow and storage of goods from suppliers to customers. Returned goods originate at the point of consumption and have to flow in the reverse direction through the suppliers, this is called Reverse Logistics. • Logistics generates place and time utility by enabling the right product at the right place. Place utility is generated by moving products where customers need them. Time utility is generated by having products when customers need them. • The purpose of logistics is to meet customers’ requirements. • Humanitarian logistics is defined as “the process of planning, implementing and controlling the efficient, cost-effective flow and storage of goods and materials, as well as related information,
from the point of origin to the point of consumption for the purpose of alleviating the suffering of vulnerable people” (Thomas and Kopczak, 2005, p. 2).
Logistics affects multiple organizations and it is possible to consider a network composed of these organizations. The company under consideration is named as the focal company and placed at the center of the network. The customers of the focal company are the warehouses and called as first tier customers. Retailers are the customers of the warehouses and they are the second-tier customers of the focal company. Similarly, the focal company has first and second tier suppliers.
Components of Logistics
The management plans, implements and controls several logistics activities. Figure 3.3 summarizes the components of logistics management and their relations.
Logistics related costs can be considered as transportation costs, inventory carrying costs, warehousing costs, order processing costs, customer service costs and lot quantity costs.
Objectives of Logistics
Logistics aims for efficient and effective activities. These can be achieved by considering three variables: profit, cost and service level.
• Profit: Except for the not-for-profit organizations, having a higher profit is desired. However, it is not easy to quantify the impact of logistics activities on sales (Ghiani, Laporte and Musmanno, 2013, p.12). • Cost: Every organization aims to minimize the logistics costs. The cost has two components: fixed and variable. Fixed costs do not change with the level of activity whereas variable costs increase as the level of activity increases. • Service level: This measure aims to assess how well the logistics system meets customers’ requirements. However, there are multiple methods to define and measure customer service level.
Transportation
Movement of goods between facilities and finally to the point of consumption is crucial. Transportation plays an important role in logistics for meeting the customers’ requirements. The share of transportation costs, being around two-thirds of the total logistics cost, is another indicator of its importance.
Demand for Transportation
Demand for transportation arises when a good is demanded in a specific location where its supply is not adequate. This is a typical situation with the occupational specialization and the resulting mass production. Transportation enables the movement of the good from an
oversupplied location (where there is mass production) to the undersupplied location (where the good is demanded).
Landed cost of a product is the sum of product’s cost at the origin and the transportation cost between origin and destination.
Reduction in transportation costs has an important impact on market size. Consider a simple example, where a product is produced at Point A with a cost of 90 units and market price is 200 units. The current transportation system has a fixed cost of 10 units and a variable cost of 1 unit per km. Given these costs, the producer can reach a market in the radius of 100 kilometers ([200-90-10]/1). Assume that an improvement in the transport system reduced the variable cost from 1 unit per km to 0.5 unit per km. With the new cost structure, the radius of the market increases to 200 kilometers ([200-90-10]/0.5) hence the total market size is four times the initial market size (from 10 000π to 40 000π). The increase in the market size is faster than the reduction in the transportation cost; this phenomenon is known as the Lardner’s Law.
Transport Measurement Units
The amount of transportation is measured in weight- distance (i.e. ton-kilometer) for freight transportation and passenger-distance for passenger transportation. Transportation demand of 500 ton- kilometers may refer to moving 500 tons of freight for one kilometer or moving one ton of freight for 500 kilometers. The costs of these two activities may be very different.
Shippers, carriers and governments are the three key players in freight transportation
Transportation Modes
There are five modes of freight transportation; road, rail, air, water and pipeline transport. Each transportation mode has distinct properties and is preferred in certain situations. These modes serve for several types of transportation demand with their varying characteristics, costs and area of span. In some cases, door-to-door service with a single transportation mode may not be preferred or it may not be even possible. In such cases a combination of multiple modes is utilized which is called multimodal transportation.
Mode Selection
Mode selection decision is made by considering two main criteria: cost and transit time.
Cost is computed based on the type of the carrier. If shipper realizes the transportation, the cost components include the depreciation and maintenance of the vehicles, employee salaries, loading and unloading costs, fuel consumption costs and all related insurances. Based on the specific requirements of the transportation and the selected mode, additional costs can be incurred.
Ghiani, Laporte and Musmanno (2013, p. 320) report water to be the cheapest mode of transportation, followed by pipeline, rail, road and air.
Transit time is the duration of the movement from the origin to the destination. This duration includes necessary loading, transport and unloading times. Transit time is affected by several factors including weather conditions, traffic and legal procedures.
Gleissner and Femerling (2013, p. 56) discuss a number of additional criteria for mode selection:
• Mass transport capacity: capability to transport large amounts of goods at low costs. • Flexible schedules: capability to adapt to changes in schedules and requirements. • Spatial flexibility: capability of changing locations of transport vehicles and integrating transport capacities • Safety: providing a safe transport for involved people and the shipped goods; collecting and monitoring safety related data such as accidents and amount of damage. • Environmental impact: monitoring pollutant and noise emissions and use of cleaner energy sources.
Characteristics of Transportation Modes
There is no mode better than others in all criteria. Each mode has special strengths and is preferred in certain conditions.
Road transportation: This mode is also referred to as truck, highway or motor carriage. Road transportation plays an important role in economy and provides door-to- door services between origin and destination.
Rail transportation: This mode is generally preferred for long distance movements. Although the rail network is well-developed to cover many large cities, it is not as extended as road network.
Air transportation: This mode offers the shortest transit time especially for long distances. However due to its high cost, it is generally used for highly valued products, perishable items and emergency cases. For providing door-to- door services, this mode is often used with road transportation.
Water transportation: This mode is considered under four categories; (i) inland waterways, (ii) lakes, (iii) coastal and intercoastal sea and (iv) international deep sea (Lambert et al., 1997, p. 224).
Pipeline: Pipelines are generally designed to transport huge amounts of a single type of product over long distances. Natural gas, crude oil, chemicals and water are typical examples of products transferred via pipelines. Associated fixed costs are very high for pipelines but variable costs are lowest among all modes.