SUPPLY

CHAIN

1. INTRODUCTION TO LOGISTICS

1.1 LOGISTICS DEFINITION

The process of planning, implementing, and efficiently controlling the flow of raw
materials, semi-finished products, finished products and related information,
from the point of origin to the point of consumption in order to satisfy customer
requirements.

Logistics is crucial for the commercial sector. It is seen as the bridge between production
and the market, which are normally separated by time and distance.

▪ Logistics in a company
Logistics also plays a key role in a company. It is thanks to logistics that any business
project can be carried out in order to obtain profitable results producing benefits,
without forgetting to please the customer.

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In business, logistics involves both planning and resource management tasks. Its
function is to efficiently implement and control materials and products. The logistics
model is present from the point of origin to the point of consumption in order to meet
customer needs at the lowest cost possible.

As we will see later, the origin of logistics stems from the military sphere. The logistics
of the 1940s was only concerned with the efficiency of storing and transporting
materials which were essential for facing the war. Otherwise, the soldiers could suffer
from a shortage of the means necessary to deal with the combatants.

1.2 TYPES OF LOGISTICS

When we speak of logistics, we can identify the following types:

▪ Supply logistics: in the logistics chain, this would be the first phase. It is
concerned with managing the raw materials needed to manufacture a product or service
that is offered to the consumer. It needs good sourcing policy, namely; defined delivery
limits, management of transport, location for materials and a good information system.
For the entrepreneur, it means placing necessary orders with suppliers and having a
warehouse or premises that allow them to store the goods until they are needed.

▪ Production logistics: in this second phase, a company manages the internal flow
of materials that correspond to a given production process. It includes the transition of
the semi-manufactured products from one phase to another on the production line, as
well as the withdrawal of products already produced.

▪ Distribution logistics: in this last phase the goal is to make deliveries to the
customer or final distributor so as to prevent the accumulation of goods in the place
that is intended for storage. This management implies a policy of distribution which,
among many other things, defines the different distribution channels, internal or
external, so that the final product reaches the customer.

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Suppliers Supplies Production Distribution Clients

The logistics techniques used in the phases of supply and distribution are similar. Table
1 compares different logistics activities, although they are not all always required.

Table 1

Logistics Activities Supply Distribution

Orders Yes Yes

Stock Management Yes Yes

Transport Yes Yes

Customer Care No Yes

Purchases Yes No

Packaging No Yes

Storage Yes Yes

Product Planning Yes Yes

Treatment of Goods Yes Yes

Information Management Yes Yes

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As can be seen, the majority of activities are the same for the supply and distribution
phases. Activities such as customer care or single packaging are necessary at the
distribution stage because in the supply phase one gets in touch with the supplier, not
the customer, and raw materials do not need to be packed.

On the contrary, we can see that purchasing activity affects only the supply channel. It
is through the purchases where the sources are selected or the quantities to be acquired
are determined.

The three types of logistics defined so far refer to types of logistics that have as their
objective the material flow from the origin of the raw materials to the final product.

Now we are going to define two other types of logistics, widely used and essential in
any company nowadays.

▪ Reverse logistics: it deals with the organization of physical and administrative

workflows in relation to orders involving refund. It collects the product from the
consumer to retrieve its value, through the repair of the product or the final destruction.
This path entails different planning than the ones discussed above.

▪ Environmental logistics: it is carried out by a group of workers responsible for

organizing and classifying industrial waste. The respect for the environment, which
contributes to the reduction of pollution, is increasingly valued in companies. The
objective of environmental logistics is to properly dispose of waste and, if possible,
recycle it.

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1.3 CHARACTERISTICS AND BASIC CONCEPTS

To understand the concept of logistics we should pay attention to the following aspects:

✓ Control: it is necessary to have real control over the merchandise. In this way it
is easier to know what quantity is available for storage, as well as the flow of material
that we may have.

✓ Planning: in order to have good control over the goods there must be rigorous
planning of the movements involved in the logistics activity.

✓ Information: it is required for coordinating planning and control actions.

Nowadays increasing amounts of information comes in a digital format since we can
obtain and modify it with ease and from any place in the world that has access to the
Internet.

The perferct
order

The Perfect
The right The exact Exact
proper documents
product moment information
amount

Minimun price

Flexibility Trustworthy
delivery

So far we have focused a lot of attention on concepts involving a more industrial side of
the logistics process. However, it is important to understand logistics as an activity that
also integrates a customer, that is, a consumer.

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The three characteristics that are described below are fundamental:

- Reliability: it encompasses the logistics system with the rest of the company’s
departments. Logistics have to be reliable and predictable in order to have a
good planning.

- Efficiency: it is very important not to confuse this concept with effectiveness
which seeks to achieve a certain result. Efficiency, on the other hand, is
understood as the fulfilment of an objective with the use of lower costs or
resources. The logistics of a company is usually quite expensive, because it
generates expenses for storage, transport, etc.

- Quality: it encompasses the planning, control, information, efficiency and
reliability. It consists of moving the product from the warehouse directly to the
consumer in the time and manner that they demand.

1.4 EVOLUTION

The evolution of logistics is marked by two factors that have been emerging more
strongly over the years, mainly the growth of international trade and new technologies.
These two areas have been renewed over time.

The most notable changes over the last decades are described below.

The field of business logistics aroused interest after the Second World War. In 1945 in
France people began to associate military logistics with industrial production.
The term ‘industrial logistics’ was established from the knowledge of technical supply of
material, placing the importance on its possible contribution to reducing production
costs.

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However, at that time the term ‘logistics’ was focused on the scope of the distribution
of the goods. There was no global vision from provisioning to the final destination.

One of the next steps during the 1950s was the use of logistics to improve the quality
and delivery time.

In the 1960s, some companies began to specialize in logistics. Other services were
outsourced to specialists in order to reduce costs.

In the 1970s, as a result of the oil crisis the costs of transport, inventory and material
handling increased. As a consequence, logistics went from being a simple distribution,
to an integrated process, taking into account both the supply and the internal handling
of material within the company. That marked the advent of a new concept: “just in
time”.

This concept deals with providing the exact quantity, at the exact moment, at the exact
time. In this way the costs are reduced even more as only the necessary amount of
material is being delivered.

Since the 1980s and especially in the 1990s, the integrated logistics model has been
established. This change is possible due to advances such as the exchange of
information, the consideration of the customer as an essential part of the logistics
concept, the improvement of relations with suppliers, the emergence of leading
companies and strategic alliances.

Today, this concept is evolving even more, integrating each of the parts of the logistics
network. It is considered as a process that incorporates the entire organization. It aims
to anticipate customer requirements, managing the necessary resources to ensure the
distribution of goods and services to the final client.

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1.5 “JUST IN TIME”

It was the concept of "just in time" that represented a major change in the logistics
model. This production system was developed by the Japanese company, Toyota Motor
Corporation. Its great success was adopted by different companies in Europe and the
United States in the early 1980s.

"Just in time" is a production method that eliminates unnecessary elements in order to

increase profits by reducing costs. It is based on producing, at all stages of the
manufacturing process, what is needed at the right time.

Like every model it has its advantages and its disadvantages.

▪ Advantages

✓ By reducing the levels of stock in the entire production line, the costs of
purchasing, financing and storage automatically decrease.

✓ Minimizing the losses from obsolete supplies.

✓ Promoting the grouping of supplies in a few suppliers, thus establishing closer

and long-term relationships.

✓ The system is more flexible and allows faster changes.

▪ Disadvantages:

✓ Problems may arise due to lack of supplies or hold-ups causing suspensions and
delays in the production line.

✓ The cost increases if we want to change the supplier.

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The "just in time" philosophy establishes what is called the five zeros, which refers to
five elements of the production chain whose cost should be zero. These elements are
the following:

1. Zero defects: in the process of production and distribution, trying to identify and
control the emergence of defective or damaged products, thus eliminating any
unnecessary costs and, therefore achieving a more productive manufacturing
process. To do this, checks will have to be established so as to avoid unnecessary
expenses in aspects such as work, machinery or sales.

2. Zero failures: If we want to serve our customers at the right time and the
required amount, we must avoid any type of breakdown of our machines. To
reduce faults to a minimum, we will have to be very demanding with the
maintenance programs and staff training so as to be more effective and better
oriented when it comes to prevention and solving minor incidents that may arise
during a workday.

3. Zero Stock: the "just in time" philosophy should be preserved, aimed at
minimizing inventories and carrying out production in accordance to the demand
and, therefore, to actual sales. This will generate large savings without requiring
large investments, since only production rates adjusted to existing orders at the
given time are needed, thus reducing the costs and improving the quality and
the service offered to the customer.

4. Zero delays: during the period of waiting, preparation and transit of the product.
Delaying deadlines tends to generate and accumulate large amounts of stock,
thus diminishing the quality of the product, and therefore, the quality of the
service and the company's image. So, it will be of utmost importance to establish
a good procedure for the procurement and distribution stages, which, with the
help of good coordination among all the agents involved in the process, will
reduce the cycles of manufacturing products.
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5. Zero bureaucracy: an internal system of information must be simple, functional
and effective. With the aim of eliminating any superfluous cost resulting from an
excess of bureaucracy and paperwork, we must rely on computerization in the
processes of management and storage of information, thus achieving the
simplification of administrative tasks.

1.6 DESIGN OF THE LOGISTICS NETWORK

The design of the logistics network defines the internal and external elements of the
business plan that it consists of. It is essential to define the time at which each process
should be conducted.

When it comes to the internal elements, we should take into account the production
sites, warehouses or distribution centres. This will form part of the infrastructure of the
company to provide solutions to the needs of customers.

The design of the logistics network is determined by two key concepts:

✓ Minimizing the total cost of the network

✓ Fulfilling the service requested by the consumer
The employer should consider these two factors at the production stage. Each case will
be different depending on the type of product. Likewise, it will also depend on the
variety and quantity of a product produced, as well as its subsequent marketing.

Once the product and its production characteristics have been established, it is
necessary to consider aspects such as the provisioning. For example, if it is necessary to
have space for storage.

In the marketing of the product we need to focus on several aspects such as the
geographical area of marketing, the number of customers and the level required by
them.
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It is also necessary to take into consideration various external elements which are
equally important: first, the globalization of markets; secondly, the legal regulation of
logistics activities and; finally, unexpected diversity of customers.

1.7 THE LOGISTICS PROCESS

As we have seen so far, logistics is related to the management of the flow of goods and
services, starting with the acquisition of raw materials and finishing with the delivery of
the product.

This implies that logistics activities should be coordinated through an effective flow of
information and, thus, closing the circle with the highest efficiency possible. In this
section you will see the different phases in the logistics process.

The different parts that make up the process are shown in Figure 2:

Distribution Purchase

Shipping Receiving



Manufacture Storage

Stock

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▪ Purchases
To supply the company, we must first know the different types of existing companies.
These are:

- A manufacturing company: the raw materials are purchased by suppliers. Once

the company has these materials, they are stored in their property until they are
used in the production process.
- A service company: in this case the flow can be of materials, documents or of
people (as a service to the public).
Suppliers play a vital role in all the logistics flows of the company in such a way that their
decisions affect, in one way or another, the rest of the production chain.

It can be noted that the cost of the company’s purchases grows continuously,
accounting for almost 80% of the total expenditure of the logistics flows of the company.

The choice of a good provider will then be a decision that has to be taken carefully so
that it meets the real needs of our company. Therefore, one needs to take a series of
essential steps to take the right decision.

- Classification of purchases
First of all, we must distinguish between all materials and materials that are needed.
A list can be made with a classification of purchases by family group, among which
we can differentiate between raw materials, equipment, consulting, etc.

However, we should also bear in mind other aspects. For example, there will be
purchases with more contribution to the quality of the final product, or others
classified as rarities that are also involved in the product.

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- Supplier-customer relationship
Putting aside the desires of an entrepreneur to find the best supplier possible, i.e.
someone at a good price, in close proximity, trustworthy, etc., may cause the
following problems:

- The figure that the contract between the supplier and the employer
indicates. This is to say, whether it requires greater or lesser dedication in
relation to the income that is going to be made.
- The supplier must be able to ensure a successful delivery at all times.
- Providers may feel pressured given that many businesses impose quality
controls on the products or materials delivered.

- Priority: product or supplier
Once the two points above have been raised, we need to give priority to either the
product that is going to be marketed or the supplier that is going to be hired. This
decision will depend on each company.

▪ Inventory
We define inventory as the amount of stored merchandise, controlling the movements
in and out of the company. Input movements are understood as the arrival of materials
for the production of goods, while the output movements refer to those products
coming out of the company with the aim of being sold to customers.

We can differentiate between three types of inventory: raw materials, semi-produced

products or finished products.

Maintaining good control over inventories is fundamental to regulating the relationship

between the supply and demand for the products that are manufactured in the

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company. If there is any alteration in any of these three types of inventory, the
production process can be interrupted. This interruption can appear due to:

▪ Interruption of the initial production process due to a lack of raw materials.

▪ Interruption of the production process in the intermediate phases; there would
be a problem in the middle of the different stages of production.
▪ The lack of availability of finished products would prevent us from corresponding
adequately to our customers.
Every company aims to achieve a perfect harmony at the optimal level of supplies,
avoiding an excess that causes expenses that may result from high inventory.

▪ Distribution
Distribution is one of the final stages where the company focuses its efforts on
improving the logistics process. The distribution can be done when the process of
elaboration of the product has been completed and it is ready to be delivered to the
customer. To avoid unnecessary costs it is important to manage this stage well.

▪ The high cost task: this period is one of the last within the logistics network and
at that time the product already has a high added value, so its cost is very high
for the company.
▪ Coordination of the product: such factors as new customer demands, the
decrease in the cycles of production and the response time in the face of the
growing market demands make it very important to organize an efficient
production output from the production centres.
▪ Good customer care: good management of this stage will reduce the order
preparation times and the percentage of damaged products, which can give the
company a competitive edge based on fast customer service.

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We can provide the customer with a set of services that will bring us closer to them and
create a greater complicity.

We can facilitate their access to our online catalogues that show our products with
detailed information about their characteristics, prices, delivery times, etc. Another
option is to provide the customer with a reliable commitment date for receiving the
order. The company achieves a reduction in costs and a greater fluidity within its chain
of production.

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