The Importance of Logistic Management - Assignment Example

Executive Summary In the recent years the world trading has taken a new form of logistics since 1970’s with a succession of energy crisis a number of companies are moving towards cost conscious particularly in respect to the cost of transport. During periods of limited industrial growth companies are unable to increase their sales hence this has made all the manufacturing companies to be more interested in productivity or cost-cutting improvements not only when it comes to manufacturing but also transportation and distribution. With the developments of both national and international trading more cost effective measures are being undertaken especially the restructuring of business organizations in relation to logistics management. This therefore has implied that certain large companies dominate a given market hence it calls for the companies to manage large amounts of goods and items which is only controlled through efficient logistics systems as well as use of advanced information technology systems. As the world becomes more industrialized the manufacturers and traders are facing new barriers related to different countries of shipment especially those related to customs duties and tariffs. With the development of transport industry it has lead to the evolvement of logistic management which has further lead to the liberalization of competition in the industry (Cohen & Lee, 1999, pp.75-110). The liberalization of transport due to the evolvement of logistic management has led to deregulation and privatization of various modes of transport which include both passenger and freight together with other related services such as seaports, airports and distribution centers. Deregulation has lead to the freedom where the operators involved in the transport industry are able to set their own prices such as fares, tariffs or freight rates. Furthermore, this has lead to the privatization of transport organizations which acts as a barrier to sourcing of materials since this has created room for complex pricing policies. This paper therefore analyzes the importance of logistic management, supply chain management, procurement management, issues in logistic and the logistic procedure involved for an Engineer from Australia to import spare parts from Japan to the Northern territory (Cooper & Ellram, 1993, pp.20-30). 1 .INTRODUCTION: BUSINESS LOGISTICS 1.1. Importance of logistics in modern economy The term logistics is used to refer to management of the entire movement of goods, information and other resources which comprise of energy and people from their point of origin to consumption for the main purpose of meeting consumers requirements. Logistics therefore is a process which entails information integration, transportation, inventory, warehousing, material handling, packaging and security. In brief logistics is used as a channel of supply hence its main purpose is to add value of time and place to utility. Logistics therefore is seen as management part of supply chain hence its main purpose is to plan, implement and control the efficient, effective forward and reverse flow of storage of goods, services and related information that occurs between the original point and consumption point (Deuermeyer & Schwarz, 1981,pp.160-195). 2.0 AN ANALYTICAL FRAMEWORK OF THE CASE With the fact that many companies are turning to sourcing components and raw materials from the Pacific Rim especially in Asia, China, Japan and India to cut on cost this does not make matters easier for the companies or traders rather more complicated since they face a lot of challenges. This clearly indicates that An Australian civil engineer contractor importing wheel dozers from Japan to construction site in Northern territory will encounter a complicated process with the fact that moving goods from Japan to Australia is not simple. Fundamentally, the trader will have a reduction in unit costs when it comes to the really process of manufacturing unit production costs but as the chain of supply lengthens the trader would have to incur direct, indirect and hidden costs before the spare parts finally arrives on the construction site that is located on the Northern territory (Geoffrion, & Graves, 2003, pp.825-850). The logistic process of sourcing spare parts from Japan for the Australian engineer therefore will involve the incurrence of direct costs. The direct costs that the engineer would incur would include shipping, nesting and de-nesting of containers at both ends of the ocean pipeline. In addition for the engineer to effectively deliver the materials to the construction site it implies that direct costs related to inventory, procurement, handling, storage, insurance and financing are paid. Apart from the direct costs the logistic process will involve other indirect costs which in really sense are difficult to identify since they are hidden but more less, these costs are attached to time. Since the longer it takes for a product to move from one place to another it becomes difficult in the logistic management to effectively manage the supply chain as cost fluctuations will automatically arise from the variable supply chain dynamics. Other hidden costs that would be incurred in the process include overtime premiums, Expedited materials handling, Buffer inventory throughout the supply chain, Price discounts, Lost sales, Flushing defective inventory from the supply chain and Congestion-related costs at ports (Geoffrion & Powers,1993). Moreover, the logistic process will involve other major barriers that the engineer will have to encounter that are related to the international shipping. These challenges include international trade complexities especially when it comes to sourcing of materials from Japan since different terms of sale, documentation, terms of payment with the fact that Japan currency is different from Australian. In addition the trader is likely to be faced with problems that are related to fluctuations when it comes to the exchange rates among others. The second challenge would involve language barrier and a number of supranational trading blocs such as (EU, NAFTA, ASEAN, etc.).The other challenge would involve the nature of international supply chains, procurement and sourcing and this simply means that the expectations that the engineer may have for the customer service he expects from Japan as a source country may not be actually be possible. Also in the process the trader might find it difficult to control over deliveries and inventories that may arise in the process an example could be the emergence of hub-spoke, transshipment and other logistics patterns that are related to the maritime transportation (Houlihan, 1990,pp.25-40). 2.1. Introduction to Supply Chain Management A supply chain can be described as a situation where a company manufactures a product from purchased parts that normally which are bought from suppliers after which the product is sold to the customers. Supply chains are very complicated though the complexity of them depends on the size of the business and the intricacy that actually includes the items to be manufactured (Lee & Billington, 1992, pp.66-80). 2.1.1. Elements of the Supply Chain A simple supply chain is made up of several elements which are normally linked to one another by the movement of products. To begin with supply chain starts with customer and here it is the customer who decides whether he or she will purchase the product or not (Lee & Billington, 1993, pp.845-870).The customer makes contacts with the sales department after which the product is delivered to the customer. The other element involved in supply chain is the planning where the customer’s sales orders are manufactured according to a given plan. The department concerned with production will ensure that the products manufactured actually meets the requirements of the customer hence it implies that the company actually purchases the required raw materials for the product. Purchasing is the third element here and it requires that the department concerned receives list of raw materials required by the production department as per the customer requirements. This clearly will enable the purchasing department to actually purchase the required raw materials to manufacture the required customer product. The fourth element is inventory where the raw materials received from suppliers are actually checked to ensure that the required quality is received from suppliers after which it is moved to the warehouse for storage. After materials have been received it clearly calls for the supplier to actually send an invoice to the company that the required items have been delivered. The raw materials received therefore are stored until the time they will be required by the production department (Lee & Billington, 1993, pp.830-848). The other element is production where in a supply chain production is actually based on a given company plan. The raw materials so far purchased are moved to the inventory for production thereafter the final product ordered by the customer is manufactured as per customer details. After the product has been manufactured it is tested and stored to the warehouse prior to customer delivery. Transportation is the last element and here finished goods are moved to the warehouse and the shipping department actually determines the exact cost efficient method to ship the product to the customer on time. After the customer has received the products then it is the duty of the customer to send and invoice to the company confirming that he/she has received the products (Masters, 1993, pp.166-198). 2.3. Supply Chain Management To ensure effective supply chain which actually generates high customer value and satisfaction at a lower cost then companies tend to adopt supply chain management processes that are actually associated with technology. Supply chain management normally involve three levels of activities which the company actually focuses on they include Strategic where the company management actually decides on high strategic decisions that actually concerns the whole organization such as size, location, manufacturing sites,partenerships with suppliers and the products to be actually manufactured (Schwarz, 1981, pp.165-194).Tactical decisions normally focus on measures that can be adopted in order to produce cost benefits which may include using best practices, developing a purchasing strategy that ensures favored suppliers, cost effective transportation among others. Operational decisions are also important and normally they focus on the business activities and the movement of finished goods which may involve making schedule changes, purchasing agreements with suppliers, taking orders from customers and moving products to the warehouse (Vollman & Berry, 1992). 2.4. Procurement and Supply Management With the fact that supply chain involves both inbound and outbound logistics then it implies that effective supply chain management requires a typical careful coordination of inbound and outbound systems. Inbound logistics therefore vary according to terms of importance, scope, cost, complexity and the company location, nature of the product and the market situation. Procurement is an important part in supply chain since it plays a role in materials management (Lee & Billington, 1992, pp.66-74). This process can be broken down into various activities which actually include need identification, definition and evaluation of user requirements, decision whether to buy or not, purchase identification decision and post purchase evaluation among others (Stenross & Sweet, 1991, pp. 341-35). 3.0 INBOUND AND OUTBOUND LOGISTICS The objective of the logistics management on the inbound side of the production line is virtually the same as that one of outbound side. The two have the main importance of providing a service to a given customer at lowest possible total cost. However, with the changing nature of global competition firms are forced to pay attention to materials management (Vollman & Berry, 1992).Sourcing is becoming global which clearly indicates that the more mature a product is the more production becomes standardized. This clearly shows that the supply chain therefore can be viewed as both inbound logistics and outbound logistics hence the two should be carefully coordinated in the supply chain management. Inbound logistics varies depending on the scope, cost and complexity of the company. In addition the company location, the nature of the product and the market situation where the product is sold are key factors inbound logistics (Lee & Billington, 1992, pp.66-74). Inbound logistics therefore embraces the flow of raw materials, components parts and supplies into the production process. Normally this referred to as materials management and inbound logistics is commonly seen as a sub-area of the production since manufacturing is done with the sense of customer in mind. Outbound logistics therefore refers to the flow of materials that are associated with storing, transportation, and distribution from the required firm to the potential customers (Lee & Billington, 1992, pp.66-74). 3.1 CRITICAL ISSUES IN INBOUND AND OUTBOUND LOGISTICS 3.1.1. Sea/air inland freight management The main purpose of logistics is the integration and optimization of the firm’s various functions with main purpose of cost reduction as well as customer satisfaction. Supply chain management therefore extends to the concept of logistic that is concerned with network of organizations. The main purpose of logistics concept therefore is to offer an integrated approach to organizations and traders where the total costs and cost trade-offs are taken into account when it comes to the transportation and production of goods and services (Lee & Billington, 1992, pp.64-91). Common trade-off analyses therefore include transport against inventory costs, production against transport costs and lastly production against inventory costs. With this fact traders involved in outsourcing are forced to use faster means of transport which are expensive in order to rescue a given consignment that could have been delayed for given reasons that may include unconnected transport, breakdown in production, and lack of stocks that could be caused by bad inventory. The key concept in sea /inland freight management is the idea of proper planning, controlling, flow, transport, storage of goods, information, management, integration of all such activities, and customer service (Lee & Billington, 1992, pp.61-83). The terms inbound transport and outbound transport in logistics are used to describe the transport of raw materials and other components from the upstream suppliers to the company as opposed to the really transport of raw materials and other components from upstream suppliers. With the fact that prices for energy are rapidly increasing it has a heavy impact on transport within the supply chains. This is due to the fact that road transport’s heavily depends on oil and this has lead to the mitigation of the green house gas emissions which further leads to increase in costs (Lee & Billington, 1992, pp.66-74). Management of freight transport therefore is important since it facilitates the movement of goods by those modes of transport which are best suited to the requirements of supply chain managers. The movement of goods in one and same loading unit (container, etc.) or road vehicle allows flexibility in the use of road, rail and/or inland water transport to respond to speed, availability, congestion, traffic bans or mandatory rest periods –provided that the inherent transshipment costs and times of intermodal transport operations can be kept lower than the gains achieved (Lee & Billington, 1992, pp.66-75). 3.1.2. Activities at the port There always has been need in logistics management for the goods to be transported form one place to another through water transportation. Due to this case sea transportation is very much important with the fact that port activity is considered to be sub-sector involved in logistics management. The port activities normally include the provision of services to the ships, cargoes and the physical movement of goods and passengers between land and sea (Masters, 1993, pp.166-196).Sea port activities therefore are seen as the nodal point between the land transport network and sea transportation on the other side. Ports acts as an integral component of the international logistics and distribution system hence ports integrate and optimize various operations with an aim of reducing costs and adding value to the customers and users. 3.1.3. Materials Handling Inbound logistics refers to the flow of raw materials, component parts and supplies into the production process. This is often referred to as materials management hence decisions made are always in respect to the customer when it comes to materials purchasing since the finished goods in reality have a great impact on the customer. Raw materials therefore are supposed to be stored very close to a manufacturing firm where finished goods are in a better position or close to the market. In respect of logistics materials handling and storage requirements is different from those of finished goods. Though logistics tends to ensure that less costs incurred costs are still a major problem in the inbound site since the products themselves are of little value. This indicates that the percentage product value, warehousing expenses normally comprise a larger proportion of the total product cost (Masters, 1993, pp.166-198). 3.1.4. Information management Clearly information management is very crucial to both inbound and outbound logistics managers .Managers normally collect and utilizes information to ensure smooth flow of raw materials in the production process. This clearly indicates that information management is very crucial since it helps organizations to make clear analysis, make forecasts and other unforeseen problems (Masters, 1993, pp.166-196). 3.1.5. Packaging Much of the concern in logistics management is concerned with solid waste disposal that is related to the packaging of materials. The most challenging part is the way to deal with the packaging of waste and the requirements required for the disposal, reduction and elimination of waste (Masters, 1993, pp.166-196). The growing awareness is having a negative consequences hence it implies that managers should always address this issue. The three main logistical functions with have a heavy impact include salvage and scrap disposal, packaging, and return of goods handling (Breitman, & Lucas, 1990, pp.95-107). . 4.0. CONCLUSION In conclusion therefore logistic management plays a very crucial role in sourcing of materials and therefore it is seen as an important part of supply chain management. Logistic management therefore is very important since it is used to plan, implement, and control the smooth movement of goods as well as the reverse flow and storage of goods and services. Normally this is related to the information flow between the original points of manufacturing to the point of consumption with the main aim of meeting customer requirements (Ballou, 1992). . List of References Ballou, R. H. 1992. Business Logistics Management, Prentice Hall, Englewood Cliffs, NJ, Third Edition. Breitman, R. L., and J. M. Lucas. 1999. PLANETS: A Modeling System for Business Planning. Interfaces, 17, Jan.-Feb., 94-106. Cohen, M. A. and H. L. Lee. 1985. Manufacturing Strategy Concepts and Methods, in Kleindorfer, P. R. Ed., The Management of Productivity and Technology in Manufacturing, 153- 188. Cohen, M. A. and H. L. Lee. 1988. Strategic Analysis of Integrated Production- Distribution Systems: Models and Methods. Operations Research, 36, 2, 216- 228. Cohen, M. A. and H. L. Lee. 1989. Resource Deployment Analysis of Global Manufacturing and Distribution Networks. Journal of Manufacturing and Operations Management, 81-104. Cooper, M. C., and L. M. Ellram. 1993. Characteristics of Supply Chain Management and the Implications for Purchasing and Logistics Strategy. The International Journal of Logistics Management, 4, 2, 13-24. Deuermeyer, B. and L. B. Schwarz. 1981. A Model for the Analysis of System Service Level in Warehouse/ Retailer Distribution Systems: The Identical Retailer Case, in: L. B. Schwarz (ed.), Studies in Management Sciences, Vol. 16--Multi-Level Production / Inventory Control Systems, North-Holland, Amsterdam, 163-193. Geoffrion, A., and G. Graves. 1974. Multicommodity Distribution System Design by Benders Decomposition. Management Science, 29, 5, 822-844. Geoffrion, A., and R. Powers. 1993. 20 Years of strategic Distribution System Design: An Evolutionary Perspective, Interfaces. (forthcoming) Houlihan, J. B. 1990. International Supply Chain Management. International Journal of Physical Distribution and Materials Management, 15, 1, 22-38. Lee, H. L., and C. Billington. 1992. Supply Chain Management: Pitfalls and Opportunities. Sloan Management Review, 33, Spring, 65-73. Lee, H. L., and C. Billington. 1993. Material Management in Decentralized Supply Chains. Operations Research, 41, 5, 835-847. Masters, J. M. 1993. Determination of Near-Optimal Stock Levels for Multi-Echelon Distribution Inventories. Journal of Business Logistics, 14, 2, 165-195. Schwarz, L. B. 1981. Introduction in: L. B. Schwarz (ed.), Studies in Management Sciences, Vol. 16--Multi-Level Production / Inventory Control Systems, North- Holland, Amsterdam, 163-193. Stenross, F. M., and G. J. Sweet. 1991. Implementing an Integrated Supply Chain in Annual Conference Proceedings, Oak Brook, Ill: Council of Logistics Management, Vol. 2, 341-351. Vollman, T. E., W. L. Berry, and D. C. Whybark. 1992. Manufacturing Planning and Control Systems, Irwin, Homewood, IL. Read More