SAMARA UNIVERSITY

COLLEGE OF DRY LAND AGRICULTURE

DEPARTMENT OF AGRIBUSINESS AND VALUE CHAIN MANAGEMENT

COURSE: LOGISTIC IN VALUE CHAIN

CODE ABVM 451(5 ECTS)

 1. INTRODUCTION TO LOGISTICS
1.1. Definition and concepts of logistics
As introduction

 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

Definitions of logistics
There are many but related definitions given for logistics. Some of them are given below:

Definition 1: Logistics is part of the supply chain process that plans, implements, and controls the efficient,

effective forward and reverses flow and storage of goods, services,

Supply chain is a term now commonly used internationally – to encompass every effort involved in producing and

delivering a final product or service, from the supplier’s supplier to the customer’s customer.”
 Definition 2: Logistics is that part of supply chain management that plans, creates and monitors the efficient(careful use of resources without
extra waste),

 Cost-effective flow and storage of goods, semi-finished items and manufactured products as well as related information between the point of
origin and the point of consumption in order to meet customers' requirements

Delivering to the right customer, and doing this at the right cost (The seven R’s)
Right- Product at the right Quantity Place Customer
Quality Time Cost

 The two major functions of logistic are materials management and physical distribution. Their short and brief definitions are given
as follows:-

A. Materials management (MM): Considers all the activities related to the manufacturing of commodities in all their stages of production along
a supply chain

 It includes production and marketing activities such as production planning; demand forecasting; and purchasing and inventory
management
 One major aspect of materials management to be considered is that it must insure that the requirements of supply chains are met by
dealing with a wide array of parts for assembly and raw materials, including packaging (for transport and retailing) and, ultimately,
recycling discarded commodities
 All these activities are assumed to be inducing physical distribution demands. As a result, materials management is
alternatively named as the induced transport segment

B. Physical distribution (PD): Refers to the collective term for the range of activities involved in the movement of final
goods from points of production to final points of sale and consumption

• One important requirement of physical distribution is that it must insure that the mobility requirements of supply chains
are entirely met

• It comprises all the functions of movement and handling of goods particularly transportation services (e.g. trucking,
freight rail, air freight, inland waterways, marine shipping, and pipelines)

• The process of Physical distribution is also called the derived transport segment. Because, all the physical distribution
activities are assumed to be derived from materials management demands

• One important confusion with regard to physical distribution is using logistics management as a synonym. However;
these two functions are very different from each other and need to be clarified
• One important requirement of physical distribution is that it must insure that the mobility requirements
of supply chains are entirely met

• Accordingly, physical distribution only considers distributing final products to the customers.

• Whereas; logistics management includes many activities from supplying the materials to customers
satisfaction

• Alternatively expressed, logistics management is a composition of a physical life cycle and physical
distribution. Furthermore; logistics management covers almost all management functions like
planning, controlling, coordinating, organizing
 1.1. Logistics concept development: Historical perspective

 The probable origin of the term logistics is the Greek word logistikos, meaning ‘skilled in
calculating’

 It was initially developed in the context of military activities in the late 18th and early 19th
centuries and launched from the military logistics of World War II

 In the military activity, logistics perform getting soldiers and munitions to the battlefront in time for
fight. Military typically incorporate the supply, movement and quartering of troops in a set

The main background of its development was the recession of America in the 1950s that caused the
industrial to place importance on goods circulations. Hence, it is seen as an integral part of the
modern production process
 1.1.2. Inbound and outbound logistics

• Based on the direction of movement of materials, logistics is classified into two

groups. These are inbound or inward logistics and outbound or outward logistics

• Inbound (inward) logistics: refers to moving materials into the organization from
suppliers

• Procurement and the related materials management are among the major
components of inbound logistics

• Procurement is the process (completion of a series of activities) of obtaining goods

and services for the firm consistent of user requirements. It links members in the
supply chain and assures the quality of suppliers in that chain.
• The quality of the materials and services that are input affects finished product quality and hence customer satisfaction and revenue.

• Whereas, materials management can be described as the planning and control of the flow of materials that are a part of the inbound
logistics system

• It usually includes the activities of procurement, warehousing, production planning, inbound transportation, receiving, materials quality
control, inventory management and control, and scrap disposal

• Outbound (outward) logistics: refers to the process of moving materials out to customers

• This implies that, outbound logistics starts at the end of the production line and ends with the allocation to or arrival at the customer

• Planning, controlling, and monitoring of the physical flow of goods as well as the associated flow of information are the main activities
under outbound logistics

• Customer service, which is related to final output, is a critical element of outbound logistics

• From the above definitions of inbound and outbound logistics, the role of logistics is indicated to be moving materials. But the question
is what do materials mean and what does it constitute? Materials has classified as tangible goods and intangible service
 1.1.3. Role and importance of logistics

A. Creation of time and place utility

B. 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

C. Inventory management: In this aspect, logistics facilitates proper management of inventory levels
that are helpful to serve the demand in a supply chain

D. Transportation: Another role of logistics is transportation that is concerned with the ways in which
physical items
 OBJECTIVES OF LOGISTIC
Improving customer service:

 As we know, the marketing concept assumes that the sure way

 To maximize profits in the long run is through maximizing the customer satisfaction.

As such, an important objective of all marketing efforts, including the physical distribution
activities, is to improve the customer service.

 An efficient management of physical distribution can help in improving the level of

customer service by developing an effective system of warehousing, quick and economic
transportation, all maintaining optimum level of inventory
 Generating additional sales:

• Another important objective of the physical distribution/logistics system

in a firm is to generate additional sales.

• A firm can attract additional customers by offering better services at

lowest prices. For example, by decentralizing its warehousing operations
or

• by using economic and efficient modes of transportation, afirm can achieve

larger market share.
 Rapid Response:

• Rapid response is concerned with a firm's ability to satisfy customer service requirements in a timely
manner.
Reduce total distribution costs:

• The cost of physical distribution consists of various elements such as transportation, warehousing and

inventory maintenance, and

• Any reduction in the cost of one element may result in an increase in the cost of the other elements.

• Thus, the objective of the firm should be to reduce the total cost of distribution and not just the cost

incurred on any one element.

• For this purpose, the total cost of alternative distribution systems should be analyzed and the one
which has the minimum total distribution cost should be selected.
 Creating time and place utilities:

• The logistical system also aims at creating time and place utilities to the
products.

• Unless the products are physically moved from the place of their origin to
the place where they are required for consumption, they do not serve any
purpose to the users.
 1.1.4. Basics of Logistics Integration

 As industrial activities extend globally, logistics will involve more material and
information flows throughout a supply chain from sources to customers,

 which extends beyond national borders. In restructuring supply chains, logistics

need to be managed as an integrated process that seeks to optimize these flows

 If all firms involved in a particular supply chain optimize their logistics systems
independently of other firms in that chain, the management of flows across the whole
chain is likely to be sub-optimal.

 To overcome this problem, integrated logistics is advised

• 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.

Levels of logistics integration

 It is worthwhile to indicate the different levels of logistics integration. The two main
integrations of industrial logistics are indicated as follows
 A. functional logistics integration

• This method, mostly, will be used in case of fragmented supply chain with many stakeholders
involved.

• The main roles of functional logistics integration, among others, include helpful for integration of

different divisions within the same company responsible for sales

• Furtherly 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)
 B. 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.
 • Effects of integrated logistics on business practices

The progressive integration of logistics across supply chains has profound effects on business
practices.

 Higher interdependency between firms interlinked within the business network, which
has become the new reality of industry.
 Performance by an individual firm affects the performance of all, and determines the ultimate
performance of the network as a whole.

 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.
 • It intensifies competition and increases the complexity of supply by expanding
product variety,

• 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.

• Much of the economic regulation of transport and telecommunications has been

liberated, leading to new market-based combinations of service providers who offer
transport combined with warehousing, telecommunications, product assembly and
related services.

• Other forms of regulations to cover consumer protection, environment and safety are
replacing the former economic restraints
 Section II: Warehouse and Inventory
2.1. Introduction to warehouse and warehousing

• The place where goods are kept is called ‘warehouse’. The person in-charge of
warehouse is called warehouse-keeper

• Warehousing refers to the activities involving storage of goods on a large-

scale in a systematic and orderly manner and making them available
conveniently when needed

• warehousing means holding or preserving goods in huge quantities from the

time of their purchase or production till their actual use or sale
• Warehousing is considered as one of the important auxiliaries to trade. This is
mainly because it creates time utility by bridging the time gap between
production and consumption of goods

• Developing a proper warehousing is not a simple task, why?

• warehousing performance will directly affect the overall supply chain

performance

• Warehousing is also an integral part to the supply chain network within which it
operates and as such its roles and objectives should synchronize with the
objectives of the supply chain
• In general, warehouses are focal points for product and information flow
between sources of supply and beneficiaries

• In other words, warehouse indicates performance of administrative and physical

functions associated with storage of goods and materials. It is also a commercial
building for storage of goods
 Objective of Warehouses

• maximum utilization of storage space;

• higher labor productivity;

• maximum asset utilization;

• reduction in material handling;

• reduction in operating cost;

• increased inventory turnover and reduced order filling time are the main one.

• Warehousing alternatives: There are three types of warehousing ownership. These are called
private warehouses, public warehouses and contract warehouses
• private warehouses: Refers to those owned or leased by the product owner

• The main features include that ownership is not the criterion; control is fully on
the hand of the product owner; the product owner exercises overall control on
warehouse management

• Furthermore; changes can be made to integrate the warehouse with rest of the
logistical system

• The private warehouses also provide market presence to the product owner and
are considered to be cheaper as there is no profit to be added to the cost
• public warehouses: This type of warehouses is that available to companies on hire.

• Public warehouses are characterized by overhead costs distributed over large

customer base (i.e. makes the usage cheaper);

• offer expertise in management since warehousing is their core business; flexibility

of location (i.e. if the product owner needs to change the location of warehouse, it is
only a question of terminating the contract and starting a new one);
• Moreover; public warehouses are classified into five categories of general
merchandise, Refrigerated, Special commodity, Bonded and Household goods
and furniture.
• Contract warehouses: in this way, contract warehouse operators take over
logistics responsibility from manufacturing company

• The contract warehouses have features of warehouse owner offers long term
relationship and customized service; product owner gets the benefit of
management expertise of the warehouse owner;

• And as the warehouse owner centrally controls several warehouses, product

owners get the benefit of shared resources with several clients. This brings
down the cost
 Warehouse operation and management
• The main warehousing operations comprises of receiving goods and accepting
responsibility; identifying goods using place, label, color code and etc

• sorting out the received goods for appropriate storage area; dispatching goods to
storage for ease of accessibility;

• holding goods for security against pilferage and deterioration; selecting,

retrieving, packing and grouping items according to customers order for dispatch

• Warehouse management deals with receipt, storage and movement of goods,

normally finished goods, to intermediate storage locations or to final customer
• The objective of warehouse management is to help in optimal cost of timely order
fulfillment by managing the resources economically

• Warehouse management is equivalent to management of storage of products and

services rendered on the products within the four wall of a warehouse

• Warehouse management is also helpful to manage goods and space more effectively,
to reduce costs and waste, and to gain control over warehouse operations

• Moreover, with access to real-time and accurate inventory data, warehouse

professionals can possibly save time in locating items or performing physical
inventories
• Similarly, sales representatives can keep tabs on stock availability, and buyers can
maintain optimum stock levels while minimizing carrying costs

• In other words, tracing items by lot or serial numbers helps to quickly identify
from where the items were purchased, how they were used in the production
processes, and where they were sold

• A key part of supply chain that primarily aims to control the movement and
storage of materials within a warehouse and the associated transactions, including
shipping, receiving, put away and picking, is called warehouse management
system.
• To efficiently monitor flow of products, the warehouse management systems
often utilize Auto ID Data Capture (AIDC) technology,

• such as barcode scanners, mobile computers, wireless LANs and potentially

Radio-frequency identification (RFID)

• Once the data has been collected, there is either batch synchronization with, or a
real-time wireless transmission to a central database
 Economic benefits of warehouses
• There are five main economic benefits of warehouses. These are movement consolidation,
break-bulk, cross-dock, processing (postponement) and stock piling

• The movement consolidation benefit indicates that warehouses reduce transportation cost by
consolidating movement

• This will be realized through the mechanism that several plants supply their products for the
same customer to a warehouse and from this warehouse the products are sent in bulk shipment
to the customer
• The break-bulk benefit of warehouses implies that goods from a plant for various customers
are shipped to a warehouse obtaining the benefit of bulk shipment and then sent to the
customers
• The cross-dock benefit of warehouses indicates that several plants send their goods to the
warehouse and from the warehouse the goods are moved across the dock to various customers
as per order

• A chain of retailers would like items as per movement of their stocks

• Processing/postponement benefit of warehouses implies that products uncommitted to a
customer are sent to the warehouse and as per their order labels, they are attached to the
products

• Process of committing the product is postponed until just in-time

• Stock piling benefit of warehouses indicates that, agricultural products which are produced
during harvest are sold round the year and hence they need stocking. For example, woolen
garments are sold during winter but produced earlier

• Service benefits of warehouses: Like economic benefits, warehouses mainly have five
service benefits. These are spot stocking, assortment, mixing, and production support and
market presence
• The spot stocking refers to a process of stocking products in strategically located
warehouses during demand sensitive period

• For instance, agricultural implements are spot stocked during the growing season. This is one
service benefit of warehouses

• The assortment service benefit of warehouses implies that a wholesaler would like to stock
assortment of items from different manufacturers so that his/her customers and/or retailers
can choose what they want

• The mixing service benefit of warehouses indicates that, in the warehouse, products from
various plants are received and combinations are prepared as per the order and sent to
customers
• The production support service benefit of warehouses implies that components and
subassemblies required by several assembly lines are stocked economically in a common
warehouse and supplied to lines
• The Market presence service benefit of warehouses implies that warehouses offer quick response to
customer demand

2.2.1. Inventory management and control

 inventory is a stock or store of goods. It also includes raw materials or stock incoming
suppliers

 As far as the questions of what to inventory are concerned, raw materials and
purchased parts; partially completed goods; finished goods inventories or merchandise;
replacement parts, tools

and suppliers and goods in transit to warehouses or goods in progress can be considered
There are two types of demand for inventory items. These are dependent demand and

independent demand

 The dependent demand refers to those items that are typically subassemblies or component

parts that will be used in the production of a final or finished product

 Subassemblies and component a part is derived from the number of finished units that will
be produced. Example: Demand for wheels for new cars

 While the independent demand refers to inventory items that are the finished goods or other
end items

These items are sold or at least shipped out rather than used in making another product
 functions of inventory

 To meet anticipated customers demand: These inventories are referred to as anticipation stocks

because they are held to satisfy planned or expected demand

 To smooth production requirements: Firms that experience seasonal patterns in demand often

build up inventories during off-season to meet overly high requirements during certain seasonal

periods. Companies that process fresh fruits and vegetable deal with seasonal inventories

 To decouple operations: The buffers permit other operations to continue temporarily while the

problem is resolved. Firms have used buffers of raw materials to insulate production from

disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations

from manufacturing disruptions

To protect against stock-outs: Delayed deliveries and unexpected increases in demand

increase the risk of shortages. The risk of shortages can be reduced by holding safety

stocks, which are stocks in excess of anticipated demand

 To take advantage of order cycles: Inventory storage enables a firm to buy and produce

in economic lot sizes without having to try to match purchases or production with demand

requirements in short run

 To hedge against price increase: The ability to store extra goods also allows a firm to

take advantage of price discounts for large orders

 To permit operations: Production operations take a certain amount of time means that
there will generally be some work-in-process inventory
• The functions of inventory imply that, inadequate control of inventories can
possibly result two main adverse effects

• First, under stocking results in missed deliveries, lost sales, dissatisfied

customers and production bottlenecks

• Second, overstocking unnecessarily ties up funds that might be more

productive. These highlights a need for due attention to inventory
management and control by the business owners or managers
 Major aspects of inventory management and control

• There are, principally, two main concerns in inventory management

• These are level of customer’s service (i.e. to have the right goods, in
sufficient quantities, in the right place and at the right time)

• And cost of ordering and carrying inventories. These two issues are
considered to be main focus areas due to their higher link with the
objectives of inventory management
• The success of effectively managing inventories incorporates the following
points:

• A system to keep track of the inventory on the hand on order (inventory

counting system);

• A reliable forecast of demand that includes an indication of possible

forecast error; knowledge of lead times and lead time variability;

• Reasonable estimates of inventory holding costs, ordering costs, and

shortage costs; and a classification system for inventory items. These pre-
conditions are shortly explained as follows.
1. Inventory counting systems: There are four major types of inventory counting systems for effective

inventory management and control

A. Periodic inventory counting system: Refers to the physical count of inventory items made at periodic

intervals (e.g. weekly, monthly, quarterly etc) in order to decide how much to order for each item

B. Perpetual (continual) inventory counting system: This system keeps track of removals from inventory on a

continuous basis to provide information on the current level of inventory for each item

C. Two-bin method inventory counting system: This system of inventory counting works with principle of

assuming two containers of inventory, reorder when the first container is empty. The advantage of this system is

that there is no need to record each withdrawal from inventory

D. Tracking (Universal Product Code) system: The Universal Product Code printed on a label that has

information about the item to which it is attached

2. Demands forecast and lead time information: The greater the potential
variability, the greater the need for additional stock to reduce the risk of a shortage
between deliveries.

 Lead time refers to the time interval between ordering and receiving the
order

3. Estimates and types of inventory costs: There are three major types of
inventory costs.

A. Holding (carrying) cost: Represents the cost incurred to carry an item in

inventory for a length of time, usually a year.
B. Ordering cost: This is a cost incurred for ordering and receiving inventory

C. Storage cost: This is a cost incurred when demand exceeds the supply of inventory on hand

Classification system for inventory items

 These are called the A-B-C approach and the Economic Order Quantity (EOQ) model

A. A-B-C approach: This approach classifies inventory items according to some measure of importance,
usually annual money usage, and then allocates control efforts accordingly

 Hence, A-represents very important inventory items; B-represents moderately important inventory
items while C-represents least important inventory items

B. Economic Order Quantity (EOQ) model: This model identifies the optimal order quantity size in
terms of minimizing the sum of certain annual costs that vary with order size
 EOQ model is targeted at order size that minimizes total cost. The EOQ model works taking
into account the following assumption

• The first one, is that only one product is involved;

• Second, annual demand requirements are known;

• Third, demand is spread evenly throughout the year so that the demand rate is reasonably
constant;

• Fourth, lead time does not vary;

• Fifth, each order is received in a single delivery and finally there are quantity discounts.

• Furthermore; the optimal quantity, that minimizes the sum of annual total cost (carrying plus
ordering cost), will be obtained by applying the following formula
 Where EOQ-represents the optimal quantity
D-Annual demand
S- Ordering cost

H- Holding (carrying) cost per unit

Example 1: The shop sells 1,000 shirts each year. It costs the company $5 per year to hold a
single shirt in inventory, and the fixed cost to place an order is $2. The EOQ formula is the
square root of (2 x 1,000 shirts x $2 order cost) / ($5 holding cost), or 28.3 with rounding.
• Generally ,economic order quantity (EOQ) is the theoretically ideal quantity of
goods that a firm should purchase that minimizes its inventory costs
 IT in warehousing and distribution
• It gave organizations the ability to better monitor transaction intensive activities such as the
ordering, movement, and storage of goods and materials

• Combined with the availability of computerized quantitative models

• Information increased the ability to manage flows and to optimize inventory levels and
movements

• Systems such as materials requirements planning, distribution resource planning, and just-in-
time (JIT) allow organizations to link many materials management activities, from order
processing to inventory management, ordering from the supplier, forecasting and productions
scheduling
Outsourcing and tender process

 Accordingly, outsourcing is a process of utilizing a third-party provider to perform services

previously performed in-house

 Whereas, tender refers to the document which describes a business transaction to be performed

 Outsourcing: There are many reasons why enterprises choose to outsource business functions

 These include permitting concentration on core business activity; to reduce overhead costs; to
utilize leading-edge technology and/or specialist skills

 Outsourcing involves some processes starting from getting an advice on tendering and the
tender process; preparation of tender documentation; reviewing and advising on tender
documentation, prime contractors or sub-contractors
 Tender process:

• Are sought for the supply of legal services

• The primary objective of tender process is to establish a panel of legal

practitioners to provide legal advice and representation to persons

• Such advice and representation, in most cases, will be provided in conjunction

with lawyers employed by the legal representation office

• The legal practitioners are to provide legal services of a high quality in an

efficient and cost effective manner
 Elements of tender process

• cover sheet: This section provides details of the tender name and number, name of the company and reference

number

• Covering letter: In this section, detail of the submission of specific tender (name and number), thanking the

company for being given the opportunity to tender for the project or work are expected to be indicated clearly

• Scope of offer or executive summary: This section of the tender document includes the summary of the proposal

to be submitted addressing the key points from the call for tender document. Besides, it is important to highlight

the key issues in the executive summary

• Tender returns: This section refers to the specific documents which went out with the call for tender from the
company and must be acknowledged by the bidder. Up on completion, these documents must be returned to the
company along with the rest of the bid.
• Commercial terms and conditions: Generally this is the financial elements of the bid

• Besides, in this section, there is a need to present the financial statements and guarantees
along with the commit to complying with the company’s requirement

• The commercial terms and conditions mainly incorporate history of tenderer, the structure
of the company, statement of compliance, details of the parties involved, timing, testing and
defects, payment, penalty clauses, liabilities, termination and options clause

• Technical requirements: While the previous elements of the tender document deals with the
commercial aspects of the project or bid, the technical requirements pertain more to the
actual operation or system i.e. the physical doing part of the bid.

• Main components under the technical requirements include statement of compliance with the
• Generic or equipment specifications, description of products, support policy,
testing, training, module repair, delivery, evaluation and product brochures