LOGISTICS AND SYSTEM ANALYSIS

Systems It is a set of interacting elements,

variables, parts or objects that are functionally related to one another that form a coherent group.

Suppliers Manufacturers Distribution

Customers channel

Cost Perspective

Cost perspective emphasize on measuring efficiency of any system by cost. Any individual part of a system operating at lower cost may not contribute to the whole system’s efficiency .

Eg: Rail transportation

Level Of Optimality

A firm should not optimize one activity at the expense of other activity. The overall firm is a system that should be optimized.

Vendors Customers

Marketing

Finance Logistics Other functions

Production

Social Political

TECHNIQUES OF LOGISTICS SYSTEM ANALYSIS

Short Run/Static Analysis

Short run situation is considered. Costs associated with various

interrelated logistic activities are considered such as transportation, warehousing, inventory, materials handling & industrial packaging.

Static since it analyses costs at one point in time or at one output level.

Example

Current system: A firm using all rail routes from plant & associated plant warehouse to the customers.

New proposed system: A firm is using market oriented warehouse. The goods would be shipped by a barge.

Plant Logistics Costs

Current System Proposed System

Packaging 500 0

Storage & Handling 150 50

Inventory Carrying 50 25

Administrative 75 25

Fixed Cost 4200 2400

Transportation Costs

To Market Warehouse 0 150

To Customer 800 100

Warehouse Costs

Packaging 0 500

Storage & Handling 0 150

Inventory Carrying 0 75

Administrative 0 75

Fixed Cost 0 2400

Total Costs 5775 5950

LONG RUN/DYNAMIC ANALYSIS

The second way to project the optimum system is to mathematically calculate the point of equality between the systems.

In example 1, system 1 and system 2 are equal at about 70,500 pounds of output. If we use a graph to determine the equally point, the accuracy is difficult. For a mathematical solution, we simply need to start with the equation for a straight line (y = a + bx).

In this particular case, ‘a’ would be the fixed costs and ‘b’ would be the variable cost per unit.

The x would be the output level. If we want to solve for the point at which the two systems are equal, we can set the two equations up as equal and plug in the cost information appropriate to solve these equations.

As is demonstrated below, at approximately 70,500 pounds the two systems are equal, and we see a point of indifference between the two systems.

System 1Total cost = fixed cost + variable cost/unit * number of unitsy = 4,200 + 0.0315xSystem 2y = 4,800 + 0.0230xTrade-off point4,800 + 0.0230x = 4,200 + 0.0315x600 = 0.0085xx = 70,588 pounds

A particular company may consider more than two logistics systems at one time. Many examples show a company considering three or sometimes four systems.

One can use the same basic methodology for plotting and mathematically solving for the points of indifference regardless of how many systems we analyse.

Further, in a particular situation involving two systems, the cost functions may not necessarily intersect. Hence, one function will be lower than the other over the entire output range.

When a company considers three or more systems, two of them may intersect while the other occurs at a higher level in the quadrant. If we have three intersecting systems, two relevant intersection points or two relevant points of indifference usually occur. A third intersection would occur at a point above some other cost function and would not be relevant.

Reasons for Selecting Proposed System

Better customer service- hence increased sales & profit.

Long run perspective- at higher output proposed system is less expensive, a company experiencing a rapid sales growth.

Factors affecting cost and role of logistics

Companies require efficient logistic management to optimize their collective performance.

Logistics management has been as a key business competency.

The three relationships which affects cost & role of logistics.

1. Competitive relationships of logistics

2. Product relationships of logistics

3. Spatial relationships of logistics

Competitive relationships of logistics

Order cycle

Substitutability

Inventory effect

Transportation effect

Product relationships of logistics

Density

Susceptibility to damage

Need for special handling

Spatial relationships of logistics

The location of manufacturing, service and warehousing facilities in supply chain strongly impacts the total supply chain cost.

Spatial relationships also increases order processing cost.

Elements

Transportation – air, water, land Warehousing Inventory Management Packing and Utilization Information and communication

Importance of Logistics Management

Transportation costs Large retailers, low distribution costs –

eg. Metro Cash and Carry Deregulation – e.g. Fiat – Tata Changing strategies – eg Toyota Way Technology – eg. Wal-Mart, DELL Globalization

0% fuel 0% investment 0% dispute 99.9999 % performance 100% customer satisfaction

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