AGRIBUSINESS MANAGEMENT

LOGISTICS IN VALUE CHAIN

ABVM (2111)

COMPILED BY:

GEDISHA KATOLA
February, 2021
Arbaminch University

Ethiopia.
Outline……..
1. Chapter one: Introduction to logistic
2. chapter two: Warehouse and Inventory
3. Chapter three:. Transportation Management
4. Chapter four: Labeling and packaging
5. Chapter five: ICT and Logistics

___________________________________________________________________________
LOGISTICS IN VALUE CHAIN
 Course Objective
At the end of this learning task, learners will be able to:
1. Explain the concepts of logistics and logistics management in
value chain
2. Apply principles of efficient provision of logistics at reduced
costs,
3. Demonstrate skills in product labeling, packaging, improving
inventory, etc.
4. Develop positive attitudes towards teamwork, quality
product, and consumer demands
 CHAPTER ONE
Introduction to Logistics

 Introduction

 Definitions of logistics

 Role and importance of logistics

 Basics of Logistics Integration

 Introduction
 In all facets of our lives, goods and services are
transported from the place they are produced to the
place they are consumed.

 This exchange process is the cornerstone of all economic

activity.

 Every organization has to move materials.

 Manufacturers have factories that collect raw materials
from suppliers and deliver finished goods to customers;
 Retail shops have deliveries from wholesalers;
 A television news service collects reports from around the
world and delivers them to viewers
 Introduction
 In the case where there are many exchanges taken place between
producers and consumers , the firms which are involved in bringing the
products or services to the market are aligned in a network called
supply chain.

Why do we have to move materials?

 Let us try to answer this question by analysing a Restaurant/

Chop bar.
 What foods do you find on the menu?
 How are they produced or prepared?
 What ingredients go into the preparation?
 Where are they sourced from?
 Introduction
Why do we have to move materials?

 Imagine how many tangible and intangible goods have been

moved in this case.
 All organisations have to move materials for even the
smallest of their processes.
 Manufacturers have to procure raw materials from suppliers
and distribute finished products to the customers
 The function that is responsible for controlling such
movement is termed ‘logistics’
 Definitions of logistics
 In theory, the term: logistics is not clearly defined
(there is some duality).
 There is no single accepted definition. Particular
authors emphasize different aspects within the
definition of the concept, relating both to economic
practice and to the area of knowledge.

 Here are some of these definitions:

Logistics is defined as part of the supply chain process that
plans, implements, and controls the efficient, effective
forward and reverses 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.
 This definition includes the flow of materials and services in both the
manufacturing and service sectors.

 Logistics is not confined to manufacturing operations alone. It also

includes the service sector with entities such as the Government,
Banks, Telecommunications, Hospitals, Educational institutions,
Retailers and the Hospitality industry.

Logistics refers to the function responsible for all aspects of

the storage and movement of materials on their journey from
original suppliers through to final customers.

o Logistics: the science of the efficient flow of materials.

• That is; all the activities, which together ensure that materials
and products are at the right place at the right time, thus
creating financial gain for the company
 Logistics refers to all the move-store activities from the point of raw
materials acquisition to the point of final consumption.

 Its core elements include customer service, order processing, inventory

management and transportation.

Logistics is defined as those activities that relate to

receiving the right product or service in the right quantity, in
the right quality, in the right place, at the right time,
delivering to the right customer, and doing this at the right
cost (The seven R’s).

o Logistics is also defined as the planning, organization, and control of

all activities in the material flow, from raw material until final
consumption and reverse flows of the manufactured product, with
the aim of satisfying the customer’s and other interest party’s needs
and wishes i.e., to provide a good customer service, low cost, low
tied-up capital and small environmental consequences.
 DEFINITIONS OF KEY TERMS
 Logistics describes the entire process of materials and
products moving into, through and out of firms.

 Inbound Logistics covers the movement of material

received from suppliers.

 Materials management describes the movement of

materials and components within a firm.

 Physical Distribution (PD) refers to the movement of

goods outward from the end of the assembly line to the
customer.

 Outbound logistic: moving materials out to customers

 DEFINITIONS OF KEY TERMS
 Warehousing is that part of a firm's logistics system that stores
products (raw materials, parts, goods-in-process, finished goods) at
and between point of origin and point of consumption

 Order processing is the term generally used to describe the

process or the work flow associated with the picking, packing and
delivery of the packed item(s) to a shipping carrier.

 Packaging is the Science, Art, and Technology of enclosing or

protecting products for distribution, storage, sale and use.

 Inventory/Stock is a quantity or store of goods that is held for

some intended purpose or use.

 Purchasing: It’s the process of ordering and receiving goods.

 LOGISTICS FUNCTIONS/ACTIVITIES
The activities of Logistics are:
• Customer service • Order processing
• Logistics • Packaging
communication • Demand Forecasting
• Purchasing/procureme • Reverse logistics
nt • Materials Handling
• Inventory control • Logistics Strategic
• Transportation planning
• Warehousing • Service support

www.knust.edu.gh
BCN67755
Decision and Risk Analysis Syed M. Ahmed, Ph.D.
 THE LOGISTICS PROCESS

LOGISTICS MANAGEMENT

Physical Supply
(Materials management) Physical Distribution

Sources of Plants/
Customers
Supply Operations

• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Management
BCN67755 actions provide the framework for logistics activities
through
Decision theAnalysis
and Risk process of Planning, ImplementationSyed
and Control
M. Ahmed, Ph.D.
• Logistics is an open system that has en exchange with its
surroundings – the aim is to supply customers efficiently
with their required products through different
subsystems;
o the material supply system; purpose is to supply production with
raw materials and components

o the production system; co-ordinates machines, personnel and

materials to achieve an efficient production process

o the distribution system; has a close relationship with the

company’s overall market strategy, which originates in the market’s
and customer’s needs, and determines what delivery service
distribution must achieve
 Goals of logistics
The goal is to create competitiveness and improve efficiency
that positively affect profits by:

1. Creating good customer service; flexible delivery service

and information on material flows
2. Focusing on cost; avoid high warehouse costs, shortage
costs, delay costs
3. Minimizing tied-up capital; capital (currents assets)
involved in the flow of materials, such as raw materials,
stocks in production and so forth
4. Flexibility of the logistics system; has an impact on
customer service, cost and tied-up capital
 Goals of logistics
The goal is to create competitiveness and improve efficiency
that positively affect profits by:

5. Focusing on TIME!
TTC: Time-to-customer
TTM: Time-to-market; from product concept to
product launch, affects competitiveness
6. Minimizing environmental impact; through use of
alternative vehicles, engines and fuels, flexible
road transportation
 Role and importance of logistics
 The value (role) of logistics can possibly be explained by:

1. Value-Added Role of Logistics

Activities in a logistics are aimed at satisfying customers’ needs by
supplying different types of products. To achieve this, 4 types of utility
must be performed in the logistic:
 Form utility – value refinement of input goods to end products
 Place utility – available at the right place
 Time utility – available at the right time
 Ownership utility – transfer of ownership to customer

 Customer services relates to the quality with which the flow of goods
and services are managed.
 Marketing/sales – ownership
 Production – form
 Distribution – place and time
 Role and importance of logistics
2. Order processing: Logistics are the means by
which firms in the logistics processes exchange
order information.
Order processing involves all the activities in the
order cycle, including collecting, checking, entering
and transmitting order information.
The information collected will provide useful data
for market analysis, financial planning, production
scheduling and logistics operations
3. Inventory management: In this aspect, logistics
facilitates proper management of inventory levels
that are helpful to serve the demand in a supply
chain.
 Role and importance of logistics
4. Transportation: is concerned with the ways in which
physical items, for example, materials, components and
finished products, are transferred between different
parties, for example, raw materials suppliers,
distributors, retailers and end customers, in a supply
chain.

 Logistics plays a key role in the economy, and the market

volume of logistics has already reached a substantial level in
many economies as a result.
 Companies that are successful worldwide have long
recognized the critical role logistics plays in creating added
value.
 Basics of Logistics Integration
• Integrated logistics is a unique business management process that
governs the flow of materials, information and goods from the
point of origin to the point of arrival, in which all management
activities are interconnected and interdependent.

 The main role of integrated logistics is to extend functional

management to include customers, suppliers and manufacturers.
 This is because companies can no longer afford to focus on supply-
side efficiency alone.

 Rather, they need to use business strategies to integrate their

demand and supply sides for achieving a competitive advantage.
 This involves the complete set of activities and organizations
relevant to production and distribution, as well as their connecting
supply links.
 Decisions made in each area impact others so that it becomes a
single, interdependent system.
 Levels of logistics integration
 It is worthwhile to indicate the different levels
of logistics integration.

 The two main integrations of industrial logistics

are:

1. The functional logistics integration

2. The market channel or external integration:

 1. The functional logistics integration
 The main roles of functional logistics integration, among others, include
 Helpful for integration of different divisions within the same company
responsible for sales and distribution activities;

 Helps companies to gain functional excellence and cost advantages in their

global supply chain operations of sourcing, conversion, distribution and after
sales service;

 Removes companies’ internal barriers and lead them to focus on tactical

solutions (e.g. rationalization of non-value-added activities, working capital,
inventories, customer services, etc).

 Furthermore; the functional logistics integration may develop into

internal integration where different companies under the same
corporate structure combine facilities, equipment, systems and
personnel in more flexible modes of deployment.
 The market channel or external integration:

 This is called the most extensive integration among

industries.
 This level of integration requires that enterprises extend
their internal supply chain process both upstream with
suppliers of raw materials and downstream to final
consumers.

 In this way, all companies in the supply chain are integrating

their activities with those of other companies to achieve
economies of joint operation.
 The market channel now becomes a virtual enterprise with
common goals, systems, organizations, facilities and shared
management.
 The market channel or external integration:

 Firms at this level are working in project organization with

suppliers and customers, and investments are made jointly.
 Companies achieving this level of integration have the
potential to realize superior levels of performance.

 Besides above two methods, some companies have adopted

logistics techniques and tools, and incorporated advanced
ICT, the emphasis for most is on achieving optimal flows
between two consecutive companies in a chain.
 Effects of integrated logistics on business practices

 The progressive integration of logistics across supply chains has

profound effects on business practices. These include the following
trends:

 Higher interdependency between firms interlinked within the business

network, which has become the new reality of industry.

 A more globalised economy links the sourcing of material and product

components with production and markets across national boundaries,
invoking problems of time, distance, cultures and diverse market
preferences.
 Effects of integrated logistics on business practices

 Changing the concept of corporate enterprise. Organizations have shed

peripheral activities to concentrate on core competencies that offer
the promise of unique value.

 Transformation of organizational structure of the corporation from a

hierarchy, in which the manager dispenses knowledge and workers
perform, to the point where knowledge is widely diffused throughout

the organization and workers manage their own activities.

 Changing the government environment, creating both problems and
opportunities.
 CHAPTER TWO

Introduction to warehouse and

warehousing
 Components of PB
1. Additional costs
• The change may cause additional costs b/c of a) a new enterprise
or b) expanded enterprise requiring the purchase of additional
inputs.
2. Reduced income
• The change may cause reduction in yield/income b/c of the
eliminated an enterprise, reduced size of an enterprise
3. Additional income
• A proposed change may cause an increase in yield/total farm
income b/c of a) the new enterprise added, b) expanded
enterprise.
4. Reduced costs
 A proposed change may cause a reduction in cost b/c of;
 elimination of an enterprise, or
 reduction in size of an enterprise or
 change in technology which decreases the need for variable
resources.
Thus, PB are useful to evaluate changes such as:
a) expanding an enterprise;

b) selecting alternative enterprises;

c) selecting different production practices;

d) deciding whether to purchase or hire equipment;

e) making a capital improvement;

f) Buying new equipment to replace hand labor or

maintaining the older equipment.
 To sum up, partial budgeting
 is intermediate in scope between enterprise
budgeting and whole farm planning.

 Contains only those income and expense items which

will change if the proposed modification in the farm
plan is implemented.

 Only the changes in income are included and not

total values.

 The final result is an estimate of the ↑ or ↓ in

profit.
Linear programing
 Mathematical programming is used to find
Linear programing(LP)
the best or optimal solution to a problem
that requires a decision or set of decisions
about how best to use a set of limited
resources to achieve a state goal of
objectives.

 Steps involved in mathematical

programming
– Conversion of stated problem into a
mathematical model that abstracts all the
essential elements of the problem.
 LP Model

An optimization model is a linear

program (or LP) if it has continuous
variables, a single linear objective
function, and all constraints are
linear equalities or inequalities.
37
Let: X1, X2, X3, ………, Xn = decision variables
The Linear Programming Model (1)
Z = Objective function or linear function

Requirement: Maximization of the linear

function Z.
Z = c1X1 + c2X2 + c3X3 + ………+ cnXn …..Eq (1)
subject to the following constraints:

…..Eq (2)

where aij, bi, and cj are given constants.

 The linear programming model can be
The Linear Programming Model (2)
written in more efficient notation as:

…..Eq (3)

The decision variables, xI, x2, ..., xn, represent levels of n

competing activities.
 Developing LP Model (1)

 The variety of situations to which linear

programming has been applied ranges from
agriculture to zinc smelting.

 Steps Involved:
– Determine the objective of the problem and describe it by

a criterion function in terms of the decision variables.

– Find out the constraints.

– Do the analysis which should lead to the selection of values

for the decision variables that optimize the criterion
 Developing LP Model (2)

Example: Product Mix Problem

The N. Dustrious Company produces two products: I and II. The raw
material requirements, space needed for storage, production rates,
and selling prices for these products are given in Table 1.

The total amount of raw material available per day for both
products is 15751b. The total storage space for all products
is 1500 ft2, and a maximum of 7 hours per day can be used
for production.
 Developing LP Model (3)
Example Problem
All products manufactured are shipped out of the storage area at the
end of the day. Therefore, the two products must share the total raw
material, storage space, and production time. The company wants to
determine how many units of each product to produce per day to
maximize its total income.

Solution
• The company has decided that it wants to maximize its sale income,
which depends on the number of units of product I and II that it
produces.

• Therefore, the decision variables, x1 and x2 can be the number of

units of products I and II, respectively, produced per day.
 Developing LP Model (4)
• The object is to maximize the equation:
Z = 13x1 + 11x2
subject to the constraints on storage space, raw
materials, and production time.

• Each unit of product I requires 4 ft2 of storage space and

each unit of product II requires 5 ft2. Thus a total of 4x1 +
5x2 ft2 of storage space is needed each day. This space
must be less than or equal to the available storage space,
which is 1500 ft2. Therefore,
4X1 + 5X2  1500
• Similarly, each unit of product I and II produced requires
5 and 3 1bs, respectively, of raw material. Hence a total of
5xl + 3x2 Ib of raw material is used.
 Developing LP Model (5)
• This must be less than or equal to the total amount of raw
material available, which is 1575 Ib. Therefore,
5x1 + 3x2  1575
• Prouct I can be produced at the rate of 60 units per hour.
Therefore, it must take I minute or 1/60 of an hour to
produce I unit. Similarly, it requires 1/30 of an hour to
produce 1 unit of product II. Hence a total of x1/60 + x2/30
hours is required for the daily production. This quantity
must be less than or equal to the total production time
available each day. Therefore,
x1 / 60 + x2 / 30  7
or x1 + 2x2  420
• Finally, the company cannot produce a negative quantity of
any product, therefore x1 and x2 must each be greater than
Graphical Solution to LP Problems (1)
 Graphical Solution to LP Problems (2)

• An equation of the form 4x1 + 5x2 = 1500 defines a straight line in

the x1-x2 plane. An inequality defines an area bounded by a straight
line. Therefore, the region below and including the line 4x1 + 5x2 =
1500 in the Figure represents the region defined by 4x1 + 5x2 
1500.
• Same thing applies to other equations as well.
• The shaded area of the figure comprises the area common to all
the regions defined by the constraints and contains all pairs of xI
and x2 that are feasible solutions to the problem.
• This area is known as the feasible region or feasible solution space.
The optimal solution must lie within this region.
• There are various pairs of x1 and x2 that satisfy the constraints
such as:
 Graphical Solution to LP Problems (3)

• Trying different solutions, the optimal solution will be:

X1 = 270
X2 = 75

• This indicates that maximum income of $4335 is obtained by

producing 270 units of product I and 75 units of product II.

• In this solution, all the raw material and available time are used,
because the optimal point lies on the two constraint lines for these
resources.

• However, 1500- [4(270) + 5(75)], or 45 ft2 of storage space, is not

used. Thus the storage space is not a constraint on the optimal
solution; that is, more products could be produced before the company
ran out of storage space. Thus this constraint is said to be slack.
 Graphical Solution to LP Problems (4)

• If the objective function happens to be parallel to one of the

edges of the feasible region, any point along this edge
between the two extreme points may be an optimal solution
that maximizes the objective function. When this occurs,
there is no unique solution, but there is an infinite number of
optimal solutions.

• The graphical method of solution may be extended to a case

in which there are three variables. In this case, each
constraint is represented by a plane in three dimensions, and
the feasible region bounded by these planes is a polyhedron.
 Ways of Solving an LP
 Graphical Method
 Enumerating all extreme points
 Simplex method invented by G. Dantzig
 Specialized software such as LINDO
 General software such as Excel solver
 Interior point methods of the sort
proposed by Karmarkar
 Specialized algorithms for special types of
LP’s

49
 Review of Common Types of LP Pbs.
1) Product mix problems
2) Make vs. buy
3) Investment/Portfolio allocation pbs
4) Scheduling
5) Transportation/Assignment problems
6) Blending
7) Multi-period planning
8) Cutting stock problems

50
Advantages of L.P Limitations

1. Allocation problems are 1. Linearity

solved.
2. Provides possible and 2. Considers only one objective
practical solutions for optimization.

3. Improves the quality 3. Does not consider the effect

of decisions. of time and uncertainty

4. Highlights the 4. No guarantee of integer

constraints in the solutions
production.
5. Helps in optimum use 5. Single valued expectations
of resources.
Questions/Queries?
 Quiz (5%)
1. Define farm planning and budgeting?(1 point)

2. Differentiate partial budgeting and

whole/complete budgeting.

3. Why and how is linear programming

important in agriculture?

54
Part two

 Product mix problem -

 How many bowls and mugs should be produced to
maximize profits given labor and materials constraints?
 Product resource requirements and unit profit:
Resource Requirements

Labor Clay
Produc Profit
(Hr./Unit (Lb./Unit
t ($/Unit)
) )
Bowl 1 4 40
Mug 2 3 50
56