Definition and Objectives of Logistics Network Management
DEFINITION OF LOGISTIC MANAGEMENT
The definition of logistics management is often equated with the notion of inventory management. Each of these meanings is not the same. Let us try to distinguish the two definitions. First of all, we will distinguish between the notion of material management (MM) and physical distribution management (PDM).
Material Management includes activities in the input transfer phase, such as raw materials and components from suppliers to be produced, while PDM includes movements in the output phase, namely the movement of finished goods from factories to final consumers through appropriate distribution channels. Logistics management is a collection of these two activities.
The objective of logistics management is to achieve operational efficiency through the integration of material procurement, material movement, and material storage activities. The need for logistics activities to be well managed is due to the emergence of transportation and storage costs, both during the input procurement period and during the output period.
The success of logistics management activities is often influenced by the presence of experts in this field. These experts can precisely identify which points or activities in logistics management need to be improved to reduce overall costs. Given the importance of logistics management, companies can outsource experts in the logistics sector if expert resources and adequate equipment are not available within the company.
For example, logistics companies often have tracking technology that can quickly locate goods as they are shipped to reduce risk during the life of the delivery. Another advantage is that the accuracy of delivery schedules can be improved, which in turn means lowering costs and improving service to buyers.
NETWORK DESIGN IN THE SUPPLY CHAIN
The design of the supply chain network includes decisions regarding:
- The role of each facility
- The role of the facility includes decisions about what role each facility should play? Also, what processes are carried out in each facility?
- Facility
- Location of the facility includes determining where the required facilities should be built?
- Capacity allocation Capacity
- Does the allocation include decisions about how much capacity should be allocated in each facility?
- Market allocation and supply Market and supply
- allocation relate to decisions about which markets each facility should serve? And, where are the sources of supply for each facility?
FACTORS AFFECTING NETWORK DESIGN DECISIONS
Decisions regarding network design are influenced by several factors, namely as follows.
Strategic Factors
The competitive strategy used by a company has a significant impact on network design decisions in the supply chain. Companies that use different strategies will make different network design decisions.
Technological Factors
The characteristics of different production technologies will have a significant impact on different network design decisions. If the technology used emphasizes high economies of scale, then a facility that has a large capacity is chosen.
If the technology used does not require large fixed costs, local facilities can be chosen to support the supply chain, with capacities that are not too large. The flexibility of the technology also affects the level of consolidation that can be achieved in the supply chain. If the production technology used is not flexible or if demand
varies from country to country, the company must provide network facilities in each market it serves. Likewise, on the other hand, if the technology used is flexible, it will be easier for companies to consolidate only a few large factories.
Macroeconomic Factors
Macroeconomic factors include taxes, tariffs, currency exchange rates, and other external economic factors. Tariffs are all obligations that must be paid when products or equipment are moved or shipped across international or national borders. Tariffs also influence network design decisions in the supply chain.
Countries that have a policy of using high tariffs cause companies to tend not to serve the local market or to set up factories in the country to save on the obligations they have to pay. Tax incentives are deductions from taxes or rates that countries often use to attract investors in regions with the development of weak economies. Currency exchange rates are also a macroeconomic factor that influences network design decisions.
Political Factors
The political stability of a country greatly influences network design decisions in the supply chain. Companies prefer to establish production facilities in countries with high stability and clear trade policies.
Infrastructure Factor
Good infrastructure can be used as a basis for production facility decisions because it can reduce costs due to the lack of infrastructure in an area.
Competitive Factors
Companies need to consider the position of their competitors when designing facilities in the supply chain. Determining how far or close to competitors affects the determination of which locations will be used by the company.
External factors, such as the availability of resources and skilled labor, which are abundant in certain areas, often require companies to be close to their competitors.
The Customer Response Time Factor
Companies that prioritize the speed of time for consumer requests stipulate that facilities must be established close to consumers.
Logistics and Facility Factors
Logistics and facilities Cost costs affect the configuration of the supply chain that is made. Changes in facilities, location, and facility allocation contribute to changes in the supply chain. Companies must consider the costs of supplies, transportation, and facilities when designing their supply chain network.
NETWORK DESIGN FRAMEWORK
Decisions regarding network design are related to managers' goals to design a network that maximizes corporate profits while satisfying consumer needs. To compile an effective network design, a manager must consider the following factors:
1. Determine Strategy of Supply Chain Required
The goal of the first phase of network design is to determine the company's supply chain strategy. Supply chain strategy focuses on what capabilities must be possessed in the supply chain network to support a competitive strategy.
Phase I begins with a clear definition of the company's competitive strategy as a basis for meeting consumer needs through the supply chain, managers must predict how the competition will be in the future, whether competitors are local companies or if there is a possibility that global companies will become competitors.
By analyzing the company's competitive strategy, competitors, economies of scale, and existing constraints, managers must determine the right supply chain strategy for the company.
2. Determining the Regional Facility Configuration
The purpose of this second phase is to identify the areas where the facilities will be located, what the functions of each facility are, and the estimated capacity of each facility. Phase II begins with forecasting demand in each country.
This demand forecast includes how much demand is in each country and also whether the demand in one country is the same or different from the demand from other countries. The same demand results in decisions regarding facilities that can be made with a large scale and capacity to meet the demand from several countries at once, whereas if the demand in each country is different, then a facility with a smaller scope will be made.
The next step is for managers to determine whether economies of scale are in line with the choice of production technology to be used and how to save costs from both of these. Furthermore,
managers must consider demand risk, currency exchange rate risk, and political risk in each country. Managers must also analyze existing competitors, to determine whether the facility will be built near or far from competitors.
Based on these data, the manager will identify regional facility configurations for the supply chain network. This regional configuration includes how many facilities will be built in an area, as well as whether the facilities to be built will serve one market or several markets at once.
3. Determining Desired Locations
The objective of the third phase is to select several alternative locations of interest in each area where the required facilities will be located. Location selection must also be based on the availability of infrastructure that can support production methods. The infrastructure required includes the availability of suppliers, means of transportation, communication, warehousing, trained workforce, labor turnover, and the business community.
4. Site Selection
The objective of the fourth phase is to select a definite location and capacity allocation for each facility. Site selection is based on the results of several locations in the third stage. The network is designed to maximize total profits based on margins and demand in each market, logistics costs and facility costs, and tariffs and taxes.
LOGISTIC COST CONTROL
Logistics managers seek to control costs by focusing on renegotiating cost rates and reducing shipping costs and streamlining supply chain operations. There are five areas most frequently used by managers to control logistics costs, namely renegotiating shipping rates, reducing transportation costs, streamlining shipping and receiving operations, working closer to suppliers, and using new technology.
Conversely, reducing storage costs and inventory costs is often not included in these five cost controls because saving in this area is very difficult and takes a long time.
One of the things that are often used to control costs is choosing regional transportation. The way that can be taken is by using a third party in terms of providing transportation, for example by using a truck service provider, which can save costs and can provide transportation facilities in large quantities.
If the company has to do this transportation service itself, it will be difficult for the company because it must also focus on problems in shipping. Cooperation with regional transportation companies is urgently needed by selecting companies that can provide faster delivery services.
Another way that managers can cooperate with companies transportation in the form of a fee waiver agreement for shipments within a certain minimum distance. Another way of saving that can be done is coordinating with related parties within the company, for example with sales personnel, to coordinate the delivery of goods appropriately to save on transportation costs.
With regards to streamlining the operations of sending and receiving goods, managers can take steps through efficient activities at the shipyard when the goods are sent, and when the goods are received. Proximity to suppliers is also one way that can be used to make savings.
The closer the relationship with the supplier, the more definite cycle of demand forecasting will be, solving various problems in the supply chain, and assessing supply chain process improvements. More close relationships with suppliers will also create better just-in-time conditions because of the assurance from suppliers.
Lastly is the importance of using the internet in logistical activities. The internet can be used in sending important letters or documents, as well as tracking the whereabouts of goods at the time of delivery.
The speed of document delivery time is important because the faster the documents are received by the business partner, the faster the business process will be carried out. Manually sending documents abroad which can take days can be shortened in just seconds.
WAYS TO REDUCE SUPPLY CHAIN MANAGEMENT COSTS
There are 10 ways that logistics managers can use to reduce supply chain management costs, which are as follows:
Develop or improve inventory management with sellers and the implementation of appropriate just-in-time methods to increase the speed and regularity of order patterns. By increasing cooperation in the supply chain and openness of demand and supply data with suppliers and consumers, it can reduce the sharp fluctuations in supply and demand.
Managers will receive the materials purchased and needed, not by buying large quantities with a fixed amount. This can reduce storage costs, required storage space, obsolescence, damage, defects, and wear. If this is managed properly, it can benefit consumers and suppliers.
Using electronic commerce methods to reduce transaction processing costs and turnaround time. Electronic data transfer between companies will reduce the labor required, reduce time, as well as potential errors related to processing time. This can reduce costs and improve services.
Centralize forecasting and inventory planning functions using experts in forecasting and planning. In a company that has several factories, demand forecasting, inventory planning, and production planning should be done centrally. Workers do their work based on the company's perspective in balancing supply and demand in the supply chain between companies.
Use software to create production schedules that optimize profitability, customer service, total assets, and capacity capabilities. Furthermore, a model will be created that can provide the best service, lowest cost, lowest inventory level, and use of materials appropriately.
Continuously review the cost of adding capacity compared to the cost of holding inventory. Companies should always review the appropriateness of their inventory level policies on an ongoing basis. Control techniques to meet peak demand are needed to maintain the stability of goods.
Rearrange the supply chain by carefully locating factories and distributing them so that it can serve the market as effectively as possible. Managers can conduct formal network studies based on previous delivery patterns to determine the optimal number and location of facilities.
Integrating production planning, inventory planning, customer service, and transportation and distribution functions to increase the availability of information and improve services. To work properly, these functions can be placed in a centralized logistics organization.
Identifying non-potential customers and products. Analyzes of less profitable customers and products should be carried out periodically and a feasibility study on total profit should be carried out. Customers or products that do not provide benefits should be considered to be eliminated or if it is to be improved must be considered whether it provides benefits to others.
Evaluate the entire supply chain operation and use functional experts, if needed, to save costs.
Centralize supply chain support functions to achieve economies of scale, streamline, and reduce transaction costs.
VALUE DENSITY
The logistics network arrangement in the supply chain cannot be separated from the objective of minimizing costs. Important decisions regarding costs include determining the location and capacity of the facility and how the product or goods should be shipped between these facilities and reach the consumer.
The method that can be used to deliver goods is called the mode of transportation. There are five basic modes of transportation, namely by road, rail, water, pipelines, and by air. Each mode has the following advantages and disadvantages.
Road (Trucking)
Delivery by road has high flexibility because goods can be sent to almost any location on the island. The ease of transit also supports the advantages of this mode, besides being able to be used for shipments in small quantities within an accessible distance.
Train
Delivery by train has the advantage of low cost, but goods cannot be delivered directly to their destination, must use trucking mode to take them to their destination.
Water (Ship)
Delivery by water (sea or river) have excess capacity accommodates large amounts as well as the cost, but it has the disadvantage that not all delivery areas have direct access to the sea/river.
Pipeline
Delivery by pipeline is limited to the delivery of liquids, gases with certain shapes and requirements. This pipeline delivery does not require packing and shipping costs are cheap. However, the cost of making pipelines is very expensive.
Air (Cargo)
Shipping by air has the advantage of being fast to the destination, but the costs involved are very expensive.
The choice of transportation mode is based on several considerations. One consideration that can be used is to take into account the value of goods per unit weight or value density. The use of value density considerations is mainly used to determine where goods are stored and how they are shipped.
Logistics Management's Objectives
1. Inventory Decrease
The biggest offender is inventory, which has a negative impact on a company's bottom line. Inventory is an asset from a financial accounting standpoint, and even when stocked in excess amount, it does not result in a significant loss.
Traditionally, businesses have kept an excess of inventory in order to provide exceptional customer service. Inventory, on the other hand, being an asset, necessitates a financial investment to obtain. The funds invested have been frozen and cannot be used for anything else. Furthermore, there is a capital cost involved.
The carrying cost will be the same as the interest on the money at the current bank borrowing rates. The carrying cost will eat into the profitability of the company. As a result, the primary goal of logistics is to keep inventory to a minimum. The customer service aim, on the other hand, can be met with little but regular supplies. Transportation costs will be substantially lower than inventory carrying costs, resulting in increased profit margins.
2. Consistent and Reliable Delivery Performance
For the customer to keep his production schedule, on-time delivery is critical. The customer is not interested in receiving the material sooner than the production schedule allows. This is an area where there is a lot of variation.
However, by properly arranging transportation modes and inventory availability, as well as including a variation factor, the variance can be reduced. Consistency in delivery performance should be another goal of logistics; this will help create consumer confidence and help maintain a long-term relationship.
3. Economy of Freight
Freight is a significant component of logistics costs. Measures like freight consolidation, mode selection, route planning, load unitizing, and long-distance shipments can help to lower this.
4. Minimum Product Damages
The cost of logistics is increased by product damage. Improper logistical packaging, frequent consignment handling, lack of load unitizing, and other factors contribute to product damage. Product damage can be reduced by using mechanized material handling equipment, load unitization, and efficient logistical packaging.
5. Fast Response
This refers to a company's capacity to provide service to a consumer in the lowest period possible. The use of cutting-edge technologies in information processing and communications will improve decision-making accuracy and speed, allowing the company to be more flexible in meeting client demands in terms of volume and variety in the quickest period possible. Smaller supplies, for example, might be delivered quickly at the place of consumption.
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