Global Supply Chain
Management
Logistics A378
Spring 2004
Chapter #2
Logistics in the Organization
The Logistics System
Customer
Transportation
Service
Information Warehouse
LOGISTICS
Systems Management
Inventory Materials
Management Management
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Overview
Marketing strategy requires the implementation of
distribution channels
Links the organization and its customers
The organization’s logistics system is designed to
support the marketing strategy
Chapters examines the relationship between
marketing channels and logistics
Must systematically manage the logistics to
support marketing's channel objectives
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Marketing/Logistics Partnership
Marketing must develop a strategy
Marketing must determine:
What products/services customers want
When they want it
Where they want it
And what level of customer service is desired
Marketing’s goal is to maintain a customer focus
and ensure that the organization meets the
customer’s requirements
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Marketing/Logistics Partnership
With a marketing strategy in hand, the
organization must implement it
Four key elements
Product (or Service)
Price
Promotion (communications)
Place
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The Marketing Mix
Product
Price Promotion
Place
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Alternative Channel Structures
Manufacturer
International Host Country Trading Trading
Wholesaler Wholesaler
Division Buying Office Company/Agent Company/Agent
Domestic
Wholesaler
International
Trading
Parent Company
Company/Agent
Wholesaler
Wholesaler Distributor
Wholesaler Distributor
Wholesaler Wholesaler Wholesaler
Wholesaler
Retailer Retailer Retailer Retailer
Customer
08/02/21 Source: Jain, Subhash C., International Marketing Management, Wadsworth, In 1993, p. 564 8
Marketing and Logistics Channels
Once marketing develops a strategy, we must
decide how to get the goods to the customers
Requires that we design a distribution channel
system (network)
Channels can be very simple
Producer sells directly to the customer
Or very complex
Multi-level global distribution networks
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Marketing and Logistics Channels
A little bit of history
When you live in a cabin and pursue a
subsistence life style, you don’t need to worry
about distribution
If someone else has something I need and can
not make for myself, I trade them something I
have for it …barter
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Marketing and Logistics Channels
With urbanization and specialization, barter is
replaced by formalized trade
We became dependent on others for basics at
first, e.g. food and fuel
Later we became dependent of others for
“luxuries”, e.g. a television
“Middlemen” (i.e., someone between the
producer and the consumer) were required to
support distribution logistics
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Marketing and Logistics Channels
Another way to view a distribution
channel is as a pipeline
Money, information and returned Product
Manufacturer
Wholesaler
Distributor
Customer
Retailer
Vendor
Products and Customer Service
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Marketing and Logistics Channels
Channel design is not a new endeavor
Only recently, however, have we begun to address it
as part of overall system design
Environmental Issues
Global economy
Deregulation
Corporate reconfiguration
Technological innovation
Total quality management/customer service
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Environmental Issues
Global economy
Hard to be “just” a domestic company today
Specialization in manufacturing
Foreign markets, suppliers and raw materials
Fragmented distribution systems on a global scale
Cultural preferences
Formal and implied etiquette of each nation’s
business culture
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Environmental Issues
Government regulatory environment
Deregulation has led to an environment in which
the rules of channel management are constantly
changing
US and other western countries led the way
New phenomenon for many countries
International initiatives also affect channel
design, e.g. NAFTA and the European Union
Management must design flexible systems and
must emphasize adaptability while maintaining
focus on customer service
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Environmental Issues
Corporate reconfiguration forces continuous
realignment of channels
Mergers, acquisitions and spin-offs
Competitors become family members
Formers suppliers are purchased by competitors
Former internal partners become suppliers and/or
competitors
Such issues require we constantly reevaluate our
distribution channel system and adapt as necessary
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Environmental Issues
Technological Innovation
Big changes in the past two decades
Satellite communications
GPS/on-line tracking of vehicles
Automated handling systems
Bar coding, EDI, XLM the internet, RFID tags, etc.
Most significantly, the use of technology as a
competitive advantage
FedEx, UPS, DHL, etc.
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Environmental Issues
Total quality management continues to be a
significant driver in business
Through the 80’s into the 90’s it was an issue we
focused on through design and manufacturing
improvement
Today it is a critical concern of channel design
The distribution channel provides a major step in
delivering customer quality
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Marketing and Logistics Channels
Marketing Issues
Must decide what type of distribution best
supports the marketing strategy
Must maintain focus on customer service
Extremely complex problem for global companies
But…must define the channel that will meet our
constraints while minimizing overall system cost
and thus maximizing system (channel) profit
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Channel Management Issues
Inevitably, one channel member dominates
Manufacturer may dominate when customer demand is
brand name driven
Retailers may be large enough to drive the channel (Wal-
Mart)
Sometimes a wholesaler or distributor dominates the
channel (Numerous small retailers)
Channel leader must manage for overall efficiency
and mutual benefit...or the channel fails to remain
competitive
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Formal and Informal Relationships
Channel management is highly dependent on
relationship management
Can be formalized through contracts
Articulate participating members’ rights and
obligations
Required for complex channel systems
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Formal and Informal Relationships
Informal relationships are often the first step
More flexibility
Chance to get to know each other and build trust
Can be the first step toward a formalized
relationship
Often all that is needed for simple channel
systems
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Domestic vs. Global Channels
Focus of the channel is the customer
Social, cultural, economic and historical
conditions force channels to be country
specific
US, Europe, Japan, India, China, Brazil, etc.
In many countries, consumers as we know them
in western society, are still evolving
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Domestic vs. Global Channels
For global firms, sourcing, production and
distribution may involve 10s of alternatives
Challenge is to define the system that best
focuses on the customer and is most efficient
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Future Trends
Supply Chain Management
An extended enterprise model enabled by technology
and required by competition
Quick response logistics
Boeing and spare parts
Strategic alliances and partnerships
One way to expand into new markets both
product/service wise and geographically
Third-party logistics providers
Providing a variety of functions more efficiently than
we can ourselves.
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Managing the Logistics System
Logistics systems support the marketing
strategy and provide channel realization
Once the channel is defined the logistics must be
designed
Numerous trade-offs are available
Fast vs. slow transport
Bulk vs. small quantities
JIT vs. local/regional warehousing, etc.
Focus must always remain on customer
service and overall system profit
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The Logistics Mix as a System
Customer
Transportation
Service
Information Warehouse
Systems Management
Inventory Materials
Management Management
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Trade-Off Analysis
Logistics activities must be managed as an
integrated system
Individual decisions affect the overall cost
Total cost view must be adopted by management
Impossible to minimize one cost without affecting
others
Failure to consider the system as a “whole”
results in suboptimal decision making
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Trade-Off Analysis
Total Cost
Inventory Costs
Monetary Logistics Costs
Transport Costs
Ordering Costs
•Computerized Order- Processing •Manual Order-Processing
•Premium Transport •Low-cost Transport
•Little Inventory •High Inventory
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Trade-Off Analysis
Total Cost Inventory
Cost
Monetary Logistics Costs
Transport Costs
Ordering Costs
•Computerized Order- Processing •Manual Order-Processing
•Premium Transport •Low-cost Transport
•Little Inventory •High Inventory
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Trade-Off Analysis
Total Cost
Monetary Logistics Costs
Inventory
Costs
Transport Costs
Ordering Costs
•Computerized Order- Processing •Manual Order-Processing
•Premium Transport •Low-cost Transport
•Little Inventory •High Inventory
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Trade-Off Analysis
Static Analysis of Quantum Chemical (50,000 lbs of production)
Plant Logistics Costs System A System B
Packaging $ 500 0
Storage and handling 150 50
Inventory carrying 50 25
Administrative 75 25
Fixed Cost 4,300 2,400
Transportation costs
To market warehouse 0 150
To customer 800 100
Warehouse Costs
Packaging 0 500
Storage and handling 0 150
Inventory carrying 0 75
Administrative 0 75
Fixed Cost 0 2,400
TOTAL COSTS $ 5,775 $ 5,950
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Trade-Off Analysis
Dynamic Analysis of Quantum Chemical
System A System B
Total Fixed Costs $ 4,200 $ 4,800
Variable Costs
Production Level 50,000 50,000
Variable Costs/lb 0.0315 0.023
Total Variable Costs 1575 1150
TOTAL COSTS $ 5,775 $ 5,950
Dynamic changing over time, i.e. the production level may change over time
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Trade-Off Analysis
Break-Even Analysis
8000
7500
Break Even Point
7000
Total Logistics Costs ($)
6500
6000
System B
5500
5000 System A
4500
4000
1 2 3 4 5 6 7 8 9 10
Lbs of Production (x1000)
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Trade-Off Analysis
Algebraically…and more accurately
Y1 = 4,200 + 0.0135x
Y2 = 4,800 + 0.0230x
Where Y1 is the total cost of System A, Y2 is the total cost of
System B and x is the level of production in pounds, then:
Y1 = Y2 defines the Break-even point
4,200 + 0.0135x = 4,800 + 0.0230x
0.085x = 600
x = 70,588 lbs
That is, below 70,588 system A is preferred and
above that point, system B is bests (lowest TC)
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Summary
Logistics decisions can not be made until a
marketing strategy is developed
Logistics supports the “place” and “price”
components of marketing
Management must view logistics as a set of
interacting activities
The goal is overall system efficiency which
yields lowest system cost and maximizes profit
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