UPI Study › Courses › Business Essentials › Free lessons › Lesson 14.5 Free with a free account
The Complexities of Logistics in Business Operations
Business Essentials · Chapter 14: Distribution Channels and Supply ChainSection 14.5 · lesson 67 of 10514 min · free with a free account
Free preview
Create a free account to keep watching
It takes a minute and costs nothing. Your free account unlocks all of Chapter 1 and 3 more lessons of Business Essentials.
Lesson complete
Earn the 3 college credits for Business Essentials
Enrolling adds a quiz after each lesson, the graded work and the official transcript. Recommended for credit by NCCRS.
Next lesson: Pricing Strategies and Strategic Pricing Considerations →← Mastering Supply Chain Management: Technology, Metrics, Partnerships, and Material FlowNext lesson: Pricing Strategies and Strategic Pricing Considerations →
In this lesson
Moving and storing goods, and the promise that decides the cost.
- Distinguish logistics from supply chain management
- Compare the 5 transportation modes
- Weigh transport cost against inventory cost
- Trace logistics cost back to the service promise
Free study notes
Get this lesson's notes by email
The key points and 4 practice questions with answers, in your inbox. One email, free.
One email. Unsubscribe in one click.
Transcript
Everything said in the video, section by section (1,946 words). Read along, or search it.
Distribution Channels and Supply Chain
The Complexities of Logistics in Business Operations
Supply chain management decides what should happen. Logistics is what actually happens. Trucks roll, pallets get shelved, and orders get picked, packed, and shipped. This section closes chapter fourteen by looking at that physical work. We'll define logistics and its seven components, then compare the five transportation modes. We'll work through a numerical trade-off between transport cost and inventory cost. Then warehousing, the centralization trade-off, and the one decision that drives nearly everything else. We'll finish with reverse logistics, outside providers, international complications, and where logistics cost hides. And with a founder who made a promise before he had a plan.
What Logistics Is
Coordination Versus Execution
Logistics is the movement and storage of goods, and of the information about them. Its distinction from supply chain management, from section fourteen point four, is precise and worth holding onto. Supply chain management coordinates the network of organizations that produce and deliver a product. Logistics is what physically happens. It's the actual movement of trucks, the actual shelving of pallets, and the actual processing of an order. So one is the coordination across the network, and the other is the work on the ground. Supply chain management is the coordination. Logistics is the execution that coordination is meant to guide. Keeping the two apart helps you look for a problem in the right place. Was the plan wrong, or was the execution?
7 Components
What Logistics Is Made Of
Logistics comprises seven components. Transportation is the physical movement of goods between locations. Warehousing is the storage of goods between the points of production and consumption. Inventory management is the ongoing decision of how much stock to hold, and where. It connects directly to cycle stock, safety stock, and stock in transit, from section fourteen point four. Materials handling is movement within a facility, like loading, unloading, and moving items around a warehouse. Packaging for transport is protective packaging built to survive shipping and handling. It's distinct from the retail packaging of section thirteen point one, which is designed mainly to inform and attract a customer. One has to survive a truck ride. The other has to catch a shopper's eye. Order processing is the set of steps from receiving a customer's order to releasing it for shipment. And reverse logistics moves goods back through the chain, chiefly for returns, repairs, or recycling.
Table 14.5.1
5 Transportation Modes
Five transportation modes carry the great majority of freight. Each has its own profile across cost, speed, reliability, the goods it suits, and how widely it reaches. Road transport, by truck, offers moderate cost, moderate speed, and the broadest accessibility of any mode. A truck can reach nearly any address with a road, so road dominates the final delivery leg of nearly every shipment. Rail offers low cost for large volumes over long distances. But it's slower, and it only reaches places on a rail line. That suits heavy, low-value bulk goods like coal or grain, where cost per unit matters more than speed. Water transport, including ocean shipping, is the cheapest mode for very large volumes, and the slowest. It needs a navigable waterway or port, and it dominates international trade in bulky, heavy goods. Air is the fastest mode, and the most expensive per unit. It only reaches places near an airport. It suits high-value, time-sensitive, or perishable goods, where the value of speed justifies the cost. Pipeline offers very low cost and high reliability for a continuous flow. But it carries only liquids and gases, along its own fixed route. That means, almost exclusively, petroleum products and similar fluids. Cost and speed move in opposite directions. Rail and water are cheap but slow, and air is fast but expensive. So the right mode depends jointly on what you're shipping, how far, and how urgently. Not on cost or speed alone.
Intermodal Transport
1 Container, 3 Modes
In practice, most freight doesn't travel by just one mode from origin to destination. Intermodal transport combines two or more modes for a single shipment. Picture goods crossing an ocean by water, packed in a standardized container. They continue inland by rail. And they complete the last leg to an individual address by road. The standardized shipping container is what makes this combination practical. The same container can be lifted straight from a ship, to a rail car, to a truck. Without it, every transfer would mean unpacking and repacking the contents.
Figure 14.5.1
Transport Cost Against Inventory Cost
Choosing a mode is a trade-off between transport cost and inventory cost. It isn't a hunt for the cheapest option, or the fastest one, in isolation. A faster mode costs more per unit shipped. But it reduces how much inventory is in transit at any moment. And it reduces the safety stock needed to guard against a long, slow, uncertain journey. Here's a worked illustration for a single shipment, with figures constructed for the exercise. At a low service level, transport costs eighteen dollars. But inventory in transit and safety stock cost fifty-eight dollars, for a total of seventy-six. At a medium service level, transport rises to thirty-four dollars, and inventory falls to thirty. The total is sixty-four. At a high service level, transport rises to sixty-two, while inventory falls to fourteen. The total is back to seventy-six. So the lowest total sits in the middle, not at either extreme. That's because the two costs move in opposite directions as speed changes. Choose by transport cost alone, or by speed alone, and you can miss the combination that minimizes total cost. The exact crossover varies with the product, the distance, and the cost of capital tied up in inventory.
Warehousing Decisions
How Many, Where, Whose, and What For
Warehousing involves several distinct decisions. The number of facilities and their locations jointly decide how far, on average, a warehouse sits from its customers. Then there's whether to own a warehouse, or contract one. Ownership gives control and a long-term cost advantage. Contracting with a third party gives flexibility, and a lower upfront commitment. Each facility also performs one or more functions. Storage is simply holding goods until they're needed. Consolidation combines smaller shipments from several sources into one larger shipment for onward transport. That captures the cost efficiency of shipping in larger volumes. Break-bulk is the reverse. One large incoming shipment is divided into the smaller shipments individual destinations need. And cross-docking unloads incoming goods and loads them straight onto outbound vehicles, with little or no storage between. The point is to minimize the time goods spend sitting in the facility at all.
The Centralization Trade-off
Fewer and Larger, or More and Smaller?
The centralization trade-off governs how many warehouses to run, and how large each should be. Fewer, larger warehouses reduce total inventory. Demand across a wide area is pooled, and served from one shared stock, instead of separate buffers at many small sites. They also cut fixed cost, since one large facility is generally cheaper to run than several with duplicated overhead. The price is distance. A single central warehouse is necessarily farther from many customers than a network of local ones would be. So delivery takes longer for at least some of them. More, smaller warehouses produce the opposite pattern. Delivery to nearby customers is shorter and faster. But total inventory is spread across more locations, and every site adds its own operating and staffing cost.
Order Processing
The Promise That Decides the Cost
Order processing is the sequence of steps from receiving a customer's order to releasing it for shipment. The order cycle is the total elapsed time that sequence takes. Now, the most important idea in this section. One variable drives most of the cost of a logistics system. It's the customer service level a business promises. That promise dictates nearly everything else. It sets how much safety stock must be held, and which transportation modes are even viable. It sets how many warehouses are needed, and where they must be. And it sets how much order processing must be automated, rather than handled by hand. A business that promises next-day delivery everywhere has, in effect, already made most of its major logistics decisions. Only certain combinations of warehouse locations, inventory levels, and transport modes can keep that promise.
Returns and Outsourcing
Reverse Logistics, and Third-Party Providers
Reverse logistics moves goods backward through the chain, from the customer toward the seller or manufacturer. It's chiefly for returns, but also for repairs and recycling. As section fourteen point three showed, returns are especially large in non-store retailing. Yet reverse logistics is often an afterthought, built hastily once returns volume becomes a visible problem. A process that makes customers print a label, repackage carefully, and travel to a drop-off point creates friction. And a business without planned space, staff, and a process for inspecting and restocking returns absorbs needless cost and delay. Designing reverse logistics as a system, from the start, is one of the more consistently underappreciated opportunities in logistics. A third-party logistics provider, often called a three P L, performs some or all logistics functions under contract. That might be warehousing, transportation, or order fulfillment. Using one is a make-or-buy decision. Build the capability yourself, or buy it as a service from a specialist. A provider brings scale, expertise, and infrastructure that would be slow and expensive for one business to replicate. That matters most for a smaller business without the volume to justify dedicated facilities. The trade-off is less direct control over the shipping experience, and dependence on another company's reliability and priorities.
Global and Hidden Costs
Where Logistics Gets Harder, and Costlier
International logistics brings complications beyond domestic movement, connecting to the global environment in section three point two. Documentation multiplies. Shipments typically need customs declarations, certificates of origin, and other paperwork. Customs processes, including inspection and the assessment of duties, add both time and uncertainty. The specific requirements and duty rates vary by country and product category, and they change over time. Lead times are typically longer, because shipments travel farther, through more handoffs. And transit time is more variable. Customs, a missed connection, or a documentation problem can each cause delay. Taken as a whole, logistics cost is a meaningful share of many products' delivered price, though the share varies widely. Much of it hides in places that are easy to overlook in a first estimate. Inventory carrying cost is often underestimated, because it includes the capital tied up in unsold goods, not just space. The cost of exceptions, like a delayed shipment, a damaged item, or a wrong order, is often left out. That's because first estimates are built around the smooth, ordinary case, not the real mix of orders. And the true cost of a promised service level is underestimated, because the promise comes before the system is costed.
Case Vignette
The Promise Made Before the Plan
A final composite case. The organization and the person are fictional. Yusuf founded Corvane Outdoor Supply. He announces free next-day delivery on all orders nationwide, as the headline of a new marketing campaign. He believes it will set his young company apart from larger, slower-shipping competitors. The promise goes out before any detailed logistics plan exists. Within weeks, he finds his single warehouse, near his home market, can't reach much of the country by next-day ground. Keeping the promise for distant customers means expensive expedited air shipping on nearly every order. Or it means new warehouse locations he hasn't budgeted for, or leased. He could narrow the promise to a reachable area, absorb expedited shipping at a thinner margin, or quickly add capacity. The constraint is that the promise is public, and customers are already ordering against it. The trade-off is the cost of fixing the system, against the reputational cost of walking back a public commitment. The reasoning turns on the service level as the decision that drives everything else. He set the promise first. Setting a service level first, and costing the system afterward, is the most common error in this area. The sound decision is to cost the system properly. Most likely, that means narrowing the promise to what one warehouse can support, and expanding deliberately later.
About Business Essentials at UPI Study
Business Essentials (Business 100) is a self-paced online course of 105 video lessons in 24 chapters, from the business environment, economics and global markets to ownership, management, leadership, operations, people, marketing, accounting, finance and banking. It carries a NCCRS credit recommendation for 3 semester credits.
Every lesson transcript is free on pages like this one, and the videos are free with a free UPI Study account. Enrolling adds a practice quiz after each lesson, the graded work and final exam that earn the credit, lifetime access, and an official transcript on completion. UPI Study has helped over 130,000 students with college credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
Enroll now → Course details Download the syllabus All Business courses Every course with PRO →
Why take it here
Why students take Business Essentials with UPI Study
Where the credit goes
Universities that work with NCCRS
Business Essentials carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
Thomas Edison State UniversitySigned partner
University of the PeopleSigned partner
Charter Oak State CollegeSigned partner
Strayer UniversitySigned partner
Columbia Southern UniversitySigned partner
Indiana TechSigned partner
Penn StateWorks with NCCRS
Southern New Hampshire UniversityWorks with NCCRS
SUNYWorks with NCCRS
+many more cooperating universitiesFind my college →Find my college → Not listed? Ask Athena in the corner of this page, or book a 15-minute call.
FAQ
Questions students ask us
About The Complexities of Logistics in Business Operations
What is the difference between logistics and supply chain management?
What are the five modes of transportation in logistics?
How do you choose a shipping mode based on total cost?
Why does the customer service level drive logistics costs?
About the Business Essentials course
How many college credits is Business Essentials?
How much does Business Essentials cost and what is included?
Which universities accept UPI Study credits?
How long does Business Essentials take?
How are the exams done?
How do my credits reach my college?
Ready for the full course? Earn 3 credits in Business Essentials.
105 video lessons, a quiz after each one, and the graded work that earns the credit. Recommended for credit by NCCRS.
3 credits · NCCRSEnroll →