Strategy and Logistics

Logistics Management
Marco Melacini
Logistics Management and Strategy

Index 2
 Logistics and the sources of value
 Logistics Strategies
 Case Studies
© Marco Melacini, Alessandro Perego

Logistics Management: objectives 3
“Logistics Management is that 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”
CSCPM (Council of Supply Chain Management Professionals)
 Effectiveness = to meet customers’ requirements

 Efficiency = to control costs

Logistics and the sources of value 4
 The right materials

 In the right quantities
 Of the right quality
At the right price
 In the right place
 At the right time VALUE
Costs
Revenues
EFFICIENCY IN
EFFECTIVENESS LEVERAGING
IN SERVING RESOURCES
THE MARKET

The impact on ROA (Return on Assets) 5
Revenues Better customer service
Operating -
income Lower logistic costs
Costs (transportation, handling, etc.)
Return on ROA = Lower inventories (Products,
Assets (ROA) Current WIP and Raw materials) +
assets Faster payments
Capital
employed +
Less resources and
Fixed assets infrastructures (warehouses,
means of transportation,
etc.)

The sources of value 6
(1) Reducing logistics costs
Information
systems
Obsolete material
and products Inventory control
Lost sales because of

Packaging
stockout
€
Transportation Storage
Picking and Handling

(1) Reducing logistics costs
 By improving the efficiency/productivity of transportation, handling,

storage, use of packaging, administrative procedures, ….
 By increasing the efficiency/productivity of the entire logistics
process by integrating the individual activities (total cost analysis,
trade-off analysis)
 By improving the quality of the logistic activities and thus reducing
the non-conformity management costs

(2) Increasing the Revenues
 By improving customer service

− getting a “premium price” for the better service
− increasing customer retention
− increasing the number of customers
− entering new markets
 By “active” outsourcing, that is by providing logistic services to other

companies

Customer Service – Classes of indicators (recap) 9
 Product Range. It is related to both the product families (width) and

the number of items per each family (depth)
 Fill Rate. Indicators that measure the capability of the supplier to
satisfy the requests of the customers through the inventory on hand in
the warehouse
 Time-related. Indicators that have to do with speed or punctuality in
relation to what the customer expects or was promised
 Accuracy. It includes all the indicators that measures the capacity of
the supplier to be accurate and compliant with the requests of the
customer

Customer Service – Fill Rate (recap) 10
 Order Fill Rate. Percentage of customer orders satisfied from stock

on hand. It depends on the order profile and Item Fill Rate
 Item Fill Rate. It’s the Fill Rate measured at the single Item/SKU
Level. It can be calculated with reference to different “units”
• Lines. Line (Item) / Fill Rate
• Cases. Case (Item) / Fill Rate
• Pieces. Piece/Unit (Item) Fill Rate
 Stockout. It’s the opposite of the Fill Rate

Customer Service – Time-related indicators (recap) 11
 Order Cycle Time. It is the time elapsed between the order issuing
and the order delivery
 Punctuality/On Time. It is the ability of the supplier to deliver in

compliance with the time window (ΔT) arranged with the customer.
In case there is no specific agreement on the time window,
punctuality is the ability to be compliant with the promised Order
Cycle Time
 Delivery Frequency. It is the number of deliveries planned in a

reference time window (day, week, month,…). It is affected by the
shelf-life of products, by the storage capabilities of the customer
and by the incidence of transportation costs on the product value

Order Cycle time (recap) 12
The Order Cycle time is defined as the elapsed between the order
issuing and the order delivery. It depends on both the time required to
carry out the activities (orders management, order fulfillment, delivery)
and the availability of goods (Order Fill rate)
1. Order Process
Delivery scheduling
Order confirmation
Availability check
2. Order
Picking Controls
Preparation
Control Order Entry
STOCK Consolidation
Packaging
Shipment to the
client
Truck Load
3. Delivery
Customer Service – Accuracy (recap) 13
 Order compliance. It is the ability of the supplier to deliver goods

that are compliant with the order specifications, in terms of both
items and quantities. it can be measured on different levels (orders,
order lines, units)
 Document compliance. It is the ability of the supplier to create
and send documents consistent with customer specifications and
with the goods delivered
 Packaging compliance. It is the ability of the supplier to use
packaging compliant with customer expectations (i.e. consistent
with the customer storage system, adequate protection of the
goods, ….).
 ….

The “margin-service” relationship 14
 COST-TO-SERVE
EURO / YEAR approach: we need to
know the logistic costs to
provide a determined
service level and we have
to assess if they are
justified or not (in terms of
impact on the revenues)
 SEGMENTATION: the
“margin-service”
relationship strongly
depends on the customer
features. Customers
should be clustered,
MMAX according to the different
weights of the service
level performances and to
SL1 SL2 SL3 SLmax the costs to provide them.
(e.g. 85%) (e.g. 95%) (e.g. 99%) (e.g. 100%)
SERVICE LEVEL

(3) Reducing the current assets
 By reducing inventories
− removing “dead” inventories
− right-sizing and deploying the safety stocks
(centralization/decentralization)
− right-sizing the cycle stocks
− …
 By reducing/controlling the “cash – to – cash” cycle time

The sources of value: C2C 16
The Cash-to-cash cycle can be defined as ‘‘the average days

required to turn a dollar invested in raw material into a dollar
collected from a customer’’ (Steward, 1995) and can calculated as:
Where:
 DSO, days of sales outstanding, are the average days required to collect accounts
receivable from customers
 DIH are the average day of inventory holding
 DPO, days of payables outstanding, are the average days allowed by suppliers to settle
accounts payable

The sources of value: C2C 17
Examples of C2C (Farris & Hutchison, 2002)

(4) Reducing the investment in fixed assets
 By better logistics/supply chain planning (less variability and less

unpredictability)
− reducing the manufacturing and warehousing capacity
− reducing the transport assets
− reducing personnel/staff
− …
 By outsourcing logistics activities

(5) Managing the trade-offs between the different sources of value

(with a net positive effect on ROA)
 By improving productivity through investments in fixed capital (e.g.

information systems)
 By improving the efficiency of the logistics activities accepting an
increase in the inventory level
 By improving customer service and revenues accepting a less than
proportional increase in the logistics costs
 By reducing the fixed capital through outsourcing accepting an
increase in the logistics costs

Exercise (1) 20
 Assume that a manufacturer in the FMCG industry has the

following base-line performance:
− Annual revenues: € 100m
− Annual operating costs: € 90m
− Fixed assets: € 50m
− Current assets: € 50m
 First, assess the base-line ROA
 Second, assess the impact on ROA of the outsourcing of
distribution to a 3PL (third party logistic service provider),
given the following assumptions:
− Additional annual operating costs: € +1m
− Reduction in Fixed assets: € -5m

Exercise (2) 21
 Third, evaluate what the increase in revenues should be to

justify a Customer Service improvement project (i.e. reducing
order cycle time through more inventories and better
information systems), assuming the following:
− Impact on Current assets (inventories): € +2m
− Increase in Fixed assets (warehouse and information
systems): € +2m

Index 22
 Case Studies

The Main Logistics Strategies 23
The main logistics strategies can be identified and classified in

different ways. Two examples are:
A. Lean vs Agile Supply Chain Strategies

Lee, 2002, Aligning Supply Chain Strategies with Product Uncertainties, California
Management Review , volume 44 number 3, pp.105-119
B. Time-based, Asset-based, Technology-based Relationship-

based Supply Chain Strategies
Coyle, Langley, Gibson, Novack, Bardi, 2009, Supply Chain Management
A Logistics Perspective, chapter 16

Supply Chain Strategy 24
(based on Hau L. Lee’s framework)
Main Idea
Supply Chain strategic approach and policies should be consistent with
the “profile” of the Supply Chain in which the company operates
(from Supply Chain profile to Supply Chain strategy)
References
 Lee, 2002, Aligning Supply Chain Strategies with Product Uncertainties,
California Management Review , volume 44 number 3, pp.105-119
 Lee, 2004, The Triple-A Supply Chain, Harward Business Review, October
2004

Define the Supply Chain strategy - Method 25
1. Know your(s) Supply Chain(s)
2. Choose your Supply Chain strategic approach
3. Define your Supply Chain strategic policies

(consistently)
4. Review your strategy over time

Know your Supply Chain 26
Demand-side uncertainty
Low High
Supply-side uncertainty
Low
High

Demand-side uncertainty 27
 Main Factors:
− Product variety
− Consumer demand volatility
− %Sales induced by promotions/discounts
− Price fluctuation
− Product life cycle (length and position in the curve)
− Introduction of new products
− Obsolescence risk
− Number and characteristics of the market segments served
− Competition level of the market
− Number of echelons in the downstream supply chain
− Importance of time-to-market
− Penetration of new markets
− ….

Supply-side uncertainty 28
 Main Factors:
− Overall Number, Number per item of suppliers

− Localization of suppliers/Country risk of suppliers
− Stability of the supplier base
− Duration of supply contracts
− Level of dependency on the supplier base
− Number of echelons in the upstream supply chain
− Financial performance of suppliers
− Maturity level of processes and technologies
− Product complexity/Number of components
− Quality level required
− Evolution of raw materials
− ….

Supply Chain Profile in different sectors 29
Low High
Automotive
Food, Designer clothing,
Low “Basic” clothing computer, pop music
Oil and
fuel
TLC, professional
High Hydroelectric energy (black-
computers, semiconductors
out), agriculture products

Supply Chain Strategies 30
(Strategic Approaches)
1. Lean (efficient) Supply Chain
2. Responsive Supply Chain
3. Risk hedging Supply Chain
4. Agile Supply Chain

“Lean” Supply Chain Strategy 31
 Objective:
The “Lean” Supply Chain strategy aims to maximize the “expected”
Return On Assets (ROA) creating both cost and value competitive
advantages
 Policies (examples):
− Non value adding activities elimination
− Focus on economies of scale
− Stock control and centralized management
− Optimization techniques aim at distribution and production
capacity maximization
− Client-supplier info sharing automation

“Agile” Supply Chain Strategy 32
 Objective:
The “Agile” Supply Chain aims to reduce risks on both the supply and
the demand side
− Short lead times
− Short TTM (time to market)
− Postponement
− Supply Chain visibility
− Supply Chain collaboration
− Inventory and other capacity resources shared between
partners to face stock out and capacity interruption
− Alternative suppliers

Supply chain Strategies: a recap 33
Comparison between Supply Chain Strategic Approaches

Lean Approach Agile approach
Product Design Maximize production at the Create modules in order to postpone
minimum costs the product differentiation
Assets Cost reduction through high Flexibility of capacity to have buffers to
utilization cope with demand/supply uncertainty
Inventories Minimize inventory in order to Keep inventory in order to face

reduce costs demand/supply uncertainty
Lead Time Lead time reduction, with no impact Lead time reduction, even though the
on costs costs are high
Suppliers Suppliers selected on both costs Selected on the basis of their flexibility/
and quality reliability, and quality

“Responsive” Supply Chain Strategy 34
 Objective:
The “Responsive” Supply Chain strategy aims to mitigate risks (related
to the changes and the diverse needs of the customers) on the
demand-side
− Build-to-order and mass customization approach, suitable to
satisfy market specific demand
− Postponement strategies
− Extra-capacity
− Short lead times
− Reduction of Time-to-market

“Risk Hedging” Supply Chain Strategy 35
Objective:
The Risk Hedging” Supply Chain strategy aims to reduce risks in supply
disruption
− Risk management orientation (resilience)
− Inventories of raw materials/components
− Back up suppliers
− Resource sharing inside supply chain, in order to share the risk of
supply interruption (e.g. co-ownership of raw materials and
components stocks with other firms)
− ICT adoption
− Real time information on inventory and demand
− Dynamic allocation of inventory and demand between partners who
share the same warehouse inventories

Consistency between Supply Chain profile 36
and Supply Chain strategy
Low High
Lean (efficient) Responsive

Low
Supply Chain Supply Chain
Risk hedging Agile

High
Supply Chain Supply Chain

and Supply Chain strategy (example)
The Central Warehouse of a big producer in food industry presents a demand

profile characterized by a lower and predictable flow of goods during the first three
weeks of each month and a higher and more variable flow of goods during the last
week of each month
Week 1 Week 2 Week 3 Week 4

250.000
Inbound
FERT IN
cartons/day
200.000 FERT
Outbound
OUT
150.000
100.000
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 2 3 4 5

and Supply Chain strategy (example)
 During the first three weeks, the company’s standard work capacity is aligned to the
demand, hence the company aims at using its resources efficiently
 During the last week, thanks to the outsourcing of the logistics activities, the company is
able to create extra capacity by working on shifts’ duration and number of workers/shift
(e.g. by exploiting workers that during the other weeks are usually employed in other
warehouses or for other activities)
LEAN model (week 1st-3th) AGILE model (week 4th)
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
33% 33% 25% 25%

Picking
33% 50%
handling with transpallets (from 33% 33% 33% 33%

picking to 33% 33%
loading bay) synergies with resources from other activities
trucks load
special forklift (side loaders) 12 12 14 14
handling with special forklifts
handling with standand forklifts
Trucks unload
Extra-capacity

The main logistics strategies can be identified and classified in

different ways. Two examples are:
A. Lean vs Agile Supply Chains

Lee, 2002, Aligning Supply Chain Strategies with Product Uncertainties, California
B. Time-based, Asset-based, Technology-based Relationship-

based Supply Chain Strategies
Coyle, Langley, Gibson, Novack, Bardi, 2009, Supply Chain Management
A Logistics Perspective, chapter 16

Working Fixed
Revenues Costs capital capital
Time based Strategies
Asset Productivity Strategies
Technology based Strategies
Relationship based Strategies

Time based strategies 41
 Cycle time reduction

− Reducing logistic processes time
− Information and Communication Technology to have faster (and
more accurate) information
− Faster decision making
 Time-reduction logistic initiatives

− Cross docking (no storage, products flow faster)
− Collaborative Planning (such as VMI = Vendor Managed
Inventory) to reduce the order cycle times
 Pull approach
− Fast manufacturing systems to reduce cycle time for ATO
(assembly to order) productions
− Postponement

Asset productivity strategies 42
 Inventory reduction
− Collaborative Planning allows inventory reduction for both the
trade partners
− Cross Docking
 Equipment utilization
− Reduction of logistic facilities
− Use of technology (such as handheld terminals) to
improve the utilization rate of the assets to move and store
products
− Direct delivery, if possible
 Third party/Contract logistic Services

− Outsourcing of Transportation
− Outsourcing of the whole logistic process
Technology based strategies 43
 eCommerce B2b (Business To Business)

− eProcurement
− eSupply chain (e.g. logistics apps)
 Automatic Identification projects

− RFId (Radio Frequency Identification)-enabled processes
(Pharma SC: https://www.youtube.com/watch?v=qULpFKMHYso)
 Automation of Warehousing and Materials Handling

− Automated Warehouses
− Automated Picking and Sorting Systems
− Wireless Technology (Wi-Fi in the warehouses, Mobile
Workspace, …)

Relationship based strategies 44
 Integration of Supply Chain processes

− Digitalisation and integration of the order-to-payment cycle (the
process at the interface between supplier and buyer)
− Standardisation of industrial labels and packaging
 Collaboration
− Exchange of supply chain planning information
− Collaborative planning (VMI, CRP, CPFR, …)
− Restructuring of the logistics network/process to streamline the
flow of goods

Index 45
 Case Studies

Case Studies 46
 Read carefully through the collection of case studies on

“Logistics and Strategy”, highlight the main “logistic projects”
and the “impact on ROA” compiling a table with the following
structure as a summary of your work
− Case Study
− Project
− Impact on ROA
• Revenues
• Operating Costs
• Fixed Assets
• Working Capital
− Logistic Strategy (Time-based, Technology-based, …)

Discussion with Logistics Executives 47
 Listen carefully to the presentations and answer the following

questions:
− What is the role of the Logistics/Supply Chain Executive in the
corporate organization chart?
− What are the activities under his responsibility?
− Why is Logistics/Supply Chain Management important in the
company and how does logistics/supply chain performance relate
to the overall corporate performance?
− How is the Logistic/Supply Chain Executive aligning the
Logistic/Supply Chain strategy with the overall corporate
strategy?

Supplementary Readings 48
 Ballou, Defining a sales-service relationship, Business logistics Management, pp.92-101

 Braithwaite, Samakh, 1998, The cost-to-serve method International journal of logistics
management, volume 9, pp.69-84
 Christopher, The corporate role of logistics, The strategy of distribution management,
pp.14-33
 Christopher, Ryals, 1999, Supply chain strategy: its impact on shareholder value,
International journal of logistics management, volume 10, pp.1-10
 Fisher, 1997, What is the Right Supply Chain for Your Product, Harward Business
Review, March-April 1997
 Lee, 2002, Aligning Supply Chain Strategies with Product Uncertainties, California
 Lee, 2004, The Triple-A Supply Chain, Harward Business Review, October 2004
 Slone, Mentzer, Dittmann, 2007, Are you the weakest link in your company’s supply
chain?, Harvard business review, September 2007, pp 116-127
 Carissimi, MC., Prataviera LB, Creazza A, Melacini M, Dallari F. Blurred lines: the timeline
of supply chain resilience strategies in the grocery industry in the time of Covid-19,
Operations Management Research, 2022

Challenge questions 49
 What’s the difference between effectiveness- and efficiency-related

performance in Logistics? Give some examples of effectiveness-
related performance?
 What is the meaning and the use of the ROA model?
 Provide some examples of different logistic strategies, their expected
impact on ROA and their alignment with the corporate strategy

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Logistics Management

Logistics Management and Strategy

 Logistics and the sources of value

© Marco Melacini, Alessandro Perego

“Logistics Management is that part of supply chain management

CSCPM (Council of Supply Chain Management Professionals)

 Effectiveness = to meet customers’ requirements

© Marco Melacini, Alessandro Perego

 The right materials

© Marco Melacini, Alessandro Perego

Revenues Better customer service

© Marco Melacini, Alessandro Perego

(1) Reducing logistics costs

Lost sales because of

Picking and Handling

© Marco Melacini, Alessandro Perego

(1) Reducing logistics costs

 By improving the efficiency/productivity of transportation, handling,

© Marco Melacini, Alessandro Perego

(2) Increasing the Revenues

 By improving customer service

 By “active” outsourcing, that is by providing logistic services to other

© Marco Melacini, Alessandro Perego

 Product Range. It is related to both the product families (width) and

© Marco Melacini, Alessandro Perego

 Order Fill Rate. Percentage of customer orders satisfied from stock

 Stockout. It’s the opposite of the Fill Rate

© Marco Melacini, Alessandro Perego

 Punctuality/On Time. It is the ability of the supplier to deliver in

 Delivery Frequency. It is the number of deliveries planned in a

© Marco Melacini, Alessandro Perego

 Order compliance. It is the ability of the supplier to deliver goods

© Marco Melacini, Alessandro Perego

© Marco Melacini, Alessandro Perego

(3) Reducing the current assets

 By reducing/controlling the “cash – to – cash” cycle time

© Marco Melacini, Alessandro Perego

The Cash-to-cash cycle can be defined as ‘‘the average days

© Marco Melacini, Alessandro Perego

Examples of C2C (Farris & Hutchison, 2002)

© Marco Melacini, Alessandro Perego

(4) Reducing the investment in fixed assets

 By better logistics/supply chain planning (less variability and less

 By outsourcing logistics activities

© Marco Melacini, Alessandro Perego

(5) Managing the trade-offs between the different sources of value

 By improving productivity through investments in fixed capital (e.g.

© Marco Melacini, Alessandro Perego

 Assume that a manufacturer in the FMCG industry has the

© Marco Melacini, Alessandro Perego

 Third, evaluate what the increase in revenues should be to

© Marco Melacini, Alessandro Perego

 Logistics and the sources of value

© Marco Melacini, Alessandro Perego

The main logistics strategies can be identified and classified in

A. Lean vs Agile Supply Chain Strategies

B. Time-based, Asset-based, Technology-based Relationship-

© Marco Melacini, Alessandro Perego