Logistica

Logistics 101: Back to Basics

By Lisa Harrington

Logistics can confound the newly initiated and veterans alike. So take out your notebook,

sharpen your pencil, and take this Inbound Logistics short course on the fundamental

concepts driving logistics theory and practice today.

Until recently, logistics activities had one primary focus -- to minimize unit transportation costs

for shipments to downstream customers.

"This focus worked well until the mid-1900s," explains Theodore Stank, associate professor of

logistics and supply chain management at Michigan State University, "when people started

thinking about logistics in the context of systems theory. Systems theory espouses managing an

enterprise or organization as an integrated whole for total optimal performance -- lowest total

costs and optimum service level, for example -- as opposed to managing discrete functions

individually for lowest costs.

"Say a company decides to sit on inventory in order to build a transportation load and thereby

obtain a lower freight rate," Stank offers by way of example. "This approach is fine if you're not

accounting for the cost of inventory. But if you ask, 'What is it costing us to have the inventory sit

on the warehouse floor for a few more days, you start to see the real cost of that decision."

"Companies began to realize that effective logistics is all about managing tradeoffs," notes Philip

Evers, associate professor of logistics management at the University of Maryland's R.H. Smith

School of Business. "When you minimize cost in one area, they often go up somewhere else. If

you ship by rail, you may reduce your transportation costs, but your inventory carrying and

packaging costs go up."

This kind of sub-optimization is a by-product of a functional orientation, explains Ed Marien,

professor and program director, Executive Education, School of Business, University of

Wisconsin.

Systems theory began to appear in logistics practice in the 1970s and 1980s. At the same time,

a major shift in how organizations viewed customer service began to take hold. Companies

started to compete on the basis of customer service, and logistics naturally played a vital role in

making such service both possible and profitable. Businesses learned that by combining the two

approaches effectively, they could offer competitive service at a lower total cost than their

competitors, and thus gain an advantage.

"We still have a way to go in realizing this dream," Stank says. "We still need more integration of

internal functional activities so the purchasing manager who is buying something to support a

downstream sale, for example, knows what needs to happen to that raw material, and is

measured or incented to pursue performance objectives that benefit the total system."

Six Degrees of Preparation

At the heart of this systems theory approach to logistics is a fundamental change in how

companies view, capture, and manage costs.

According to Marien, six stages in enterprise costing today pertain to logistics. These stages

reflect an increasing shift toward a systems approach to management and are evolving as follows

Stage 1: Direct cost or price of purchased materials.

Stage 2: Net delivered cost of goods purchased.

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