Logistics require consideration of the entire system

Considering the big picture

Commercial value-added processes and logistics activities are characterized by a multitude of interrelationships. A company that ignores these relationships can quickly experience huge cost disadvantages. For this reason, modern logistics concepts are characterized by a new focus on systems and total costs. As a result, overarching business issues and interrelationships are considered from the start to minimize costs.

Interrelationships require systems thinking

Systems thinking is a fundamental aspect of logistics. In this process, consideration is given to many individual, interlinked elements. The entire logistics system can be broken down into tasks to be performed: order processing Order processing , warehousing Warehousing , packaging Packaging and transport Transport . In addition, a distinction between the various phases of the flow of goods and information can be drawn: procurement Procurement logistics , production Production logistics , distribution Distribution logistics , reverse Reverse logistics and spare-parts logistics Spare-parts logistics .
However, to be able to explain the entire logistics system, we cannot merely consider the individual elements in isolation. In the same way, we cannot merely consider the system as a whole. To grasp the entire logistics system, we must consider all of the individual elements in the context of their interaction with one another.
The objective of systems thinking is to avoid sub-optimal isolated solutions when logistics decisions are made, e.g., solutions that are optimal only for warehousing Warehousing . Rather, when the interrelationship of resources and processes is taken into consideration, the objective is optimized broad solutions [1].

Total costs as a yardstick for success

Interrelationships exist not only between the various elements of a logistics system itself, but also between the costs of individual elements. A cost reduction in one logistics subsystem can trigger a cost increase in another subsystem. In some cases, it can boost the cost of the entire logistics system.
Total cost orientation is a significant factor in logistics decisions because logistics systems are characterized by an array of cost conflicts [1].

Cost dependency between logistic subsystems

This article contains additional information and interactive features.
Open the Flash version of this article here.

Example 1: Reduction of order processing costs through consolidation of orders

When orders are consolidated, better capacity utilization can be achieved in transportation and shipment frequency reduced. However, inventory levels could rise because more goods are delivered at one time. In some cases, warehouse capacity may not suffice, necessitating a larger warehouse. Consolidated orders can benefit packaging if larger packaging units, such as pallets, can be used.

Example 2: Reduction of inventory costs from just-in-time delivery

Since a just-in-time delivery occurs only when it is required, no warehousing is necessary. No warehouse is needed as a result. However, safety stocks Safety stock are set up in some cases to serve as a reserve. In just-in-time delivery, delivery frequency increases, and transport costs rise along with it. In addition, packaging may produce higher costs if smaller production lots must be packed more elaborately for transport. In just-in-time delivery, the supplier often receives the orders electronically, reducing the effort required for order processing.

Example 3: Reduction of warehousing costs through a central warehouse

A central warehouse reduces transport costs required to supply warehouses. However, transport costs related to deliveries can increase as a result of longer distances that must be covered. Inventories, in turn, can be reduced as safety stocks Safety stock are needed only in one warehouse. Economies of scale can be achieved in both packaging and in order processing – e.g., for packaging materials or automated handling processes.

Further interrelationships in logistics

Interrelationships exist not just among logistics subsystems. Systems thinking also considers processes related to logistics. For example, decisions made about production lots have a direct effect on warehousing costs. The greater the production lots, the larger the number of manufactured products. These products must be stored, resulting in increased warehousing costs. Still, production strives to keep production lot sizes large because equipment has to be re-tooled less often and costs can be saved as a result. Given these factors, logistics and production must work together on ways to optimize total costs.