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Unit 2: Introduction to Logistic

ready to be installed. Cisco’s outsourcing strategy took another step forward recently, Notes
with the decision to turn over shipping and warehousing functions to FedEx Corp. The air,
ground, and logistics services provider will manage a merge-in-transit operation for
direct shipment to end customers, resulting in the near elimination of Cisco-operated
warehouses within 5 years.
Source: Upendra Kachru, (2010), “Exploring the Supply Chain,” Excel Books
Self Assessment

Fill in the blanks:
1. The word, ‘logistics’ is derived from French word …………………….
2. …………………… management means the movement of material and components inside
a firm.
3. Logistics is typically considered as a sub-set of …………………….

2.2 Logistics Value Proposition

Thus far it has been established that logistics should be managed as an integrated effort to
achieve customer satisfaction at the lowest total cost. Logistics performed in this manner creates
value. In this section, the elements of the logistical value proposition-service and cost
minimization-we discussed in greater detail.

2.2.1 Service Benefits

Almost any level of logistical service can be achieved if a firm is willing to commit the required
resources. In today’s operating environment, the limiting factor is economics, not technology,
For example, a dedicated inventory can be maintained in close geographical proximity to a
major customer. A fleet of trucks can be held in a constant state of delivery readiness. To
facilitate order processing, dedicated communications can be maintained on a real time basis
between a customer and a supplier’s logistical operation. Given this high state of logistical
readiness, a product or component could be delivered within minutes of identifying a customer
requirement.
2.2.2 Cost Minimization

This is decision based on cost minimization criteria. The least-total-cost system design includes
both the transportation costs as well as the inventory costs. Figure 2.2 illustrates the concept. In
the figure, ‘The total transportation cost’ curve has a low at eight facilities. However, the ‘Total
inventory cost’ curve shows an increase with each additional warehouse. For the overall system,
the optimal system network is reflected by the ‘Total cost network’, which in this figure is
shown to be six locations.
Though a great many problems must be overcome to effectively examine total cost, particularly
the assumptions of single planning period and average size shipment, the analysis for least-
total-cost solution shown in Figure 2.2 illustrates the trade-offs between cost-generating activities.

While the transportation costs determine the economically viable number of locations; the
inventory cost modulates both the number and the size of the warehouse. The minimal total-
cost point for the system is not at the point of least cost for either transportation or inventory
reflecting the approach of integrated logistical analysis.

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