TOPIC 2 “LOGISTICS STRATEGY AND PLANNING”

1) Logistics mission, strategy and plan

2) Logistics objectives
3) Levels of logistics planning
4) Strategic logistics planning
5) Basic logistics strategies
6) Lean and agile logistics strategies

Textbooks
1) Christopher, M. Logistics & Supply Chain Management, 5th ed. -
FT Press, 2016. – 305 p.
2) Harrison, Alan, Remko van Hoek Logistics management and
strategy : competing through the supply chain, 3rd ed. –
Edinburgh: Pearson Education Limited., 2008. – 343 p.
3) Coyle, John J., Langley, John C., Novack, Robert A., Gibson,
Brian J. Supply Chain Management: A Logistics Perspective, 10th
ed. - South-Western: Cengage Learning, 2016. – 672 p.
Additional:
1) Ambe, Intaher M., Badenhorst-Weiss, Johanna A. Framework
for choosing supply chain strategies // African Journal of Business
Management Vol. 5(35). – 2011. – P. 13388-13397.

1. Logistics Mission, Strategy and Plan

Logistics missions are useful for setting the scene, and showing the
overall direction and priorities. They are much less common than
mission statements for the whole organization.
Logistics mission is to provide a company with the ability to
procure, receive, warehouse and move all key supplies at the lowest total
costs while ensuring the clients have the right product at the right time to
deliver the highest service level in the market it works.
The formulation of the logistics mission based on “7 Rights” of
logistics. According to the Bill of “7 Rights” logistics embodies the
effort to deliver:
• the right product
• in the right quantity
• in the right condition
• to the right place

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 • at the right time
• for the right customer
• at the right cost
Taking into account the logistics mission and the firm’s overall
objectives, the logistics strategy is developed. This process is no less
important than developing the corporate strategy. A good logistics
strategy may become a competitive advantage for a company.
And now what company’s logistics strategy is indeed.
Logistics strategy is the set of guiding principles, driving forces
and ingrained attitudes that help to coordinate goals, plans and
policies, and which are reinforced through conscious and
subconscious behaviour within and between partners across a
network.
When a company creates a logistics strategy it is defining the
service levels at which its logistics organization is at its most cost
effective. Because supply chains are constantly changing and evolving, a
company may develop a number of logistics strategies for specific
product lines, specific countries or specific customers.
There are four approaches to setting any strategy. They depend on
different motivations for setting strategy:
● How deliberate are the processes of strategy setting? These can
range from clearly and carefully planned to a series of decisions taken
on a day-to-day basis.
● What are the goals of strategy setting? These can range from a
focus on maximizing profit to allowing other business priorities such as
sales growth to be included.
According to these two considerations Figure 1 suggests four
options for crafting strategy.

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 Figure 1 - Four options for crafting strategy

And now let’s present a brief description of the four options:

● Evolve. ‘Strategy’ is not something that is formally undertaken at
all. ‘Our strategy is not to have a strategy’ is a typical viewpoint.
Operating decisions are taken in relation to the needs of the moment,
with financial goals as the main guiding principle.
● Classical. While financial goals are again the main guiding
principle, these are achieved through a formal planning process. This is
called ‘classical’ because it is the oldest and most influential option.
● Accommodate. Here, decisions are back to the day-to-day mode,
but financial objectives are no longer the primary concern. Strategy is
accommodated instead to the realities of the focal firm and the markets
in which it operates.
● Systemic. This option for strategy setting sees no conflict
between the ends and means of realising business goals. While goal
setting takes place across all major aspects of the business (including
human resources, marketing and manufacturing policies), these are
linked to the means by which they will be achieved in practice.
Which approach, in your opinion, is typical for setting logistics
strategy? Logistics strategy usually demands systemic strategy setting
between network partners, who may have to coordinate their activities
across different market segments.
There are several important issues concerning the logistics
strategy. The first is the need to link the logistics directly with the
corporate strategy. This is best achieved by ensuring that logistics is an

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integral part of the corporate strategy and that factors related to these
functions are used as inputs in the overall strategy planning process. The
second, and in many ways most important, issue is whether or not a
company has a structured logistics strategy and plan at all. Many still
don’t, so a first and major step may be to ensure that such a plan is
developed, based of course on the company’s business and competitive
strategic plans.
To achieve this, a logistics strategy planning framework, as
outlined in Figure 2, can be used.

Figure 2 - Logistics strategy planning framework

A company can start to develop a logistics strategy by looking at

four distinct levels of their logistics organization.
 Strategic: By examining the company’s objectives and strategic
supply chain decisions, the logistics strategy should review how
the logistics organization contributes to those high-level
objectives.
 Structural: The logistics strategy should examine the structural
issues of the logistics organization, such as the optimum number of
warehouses and distribution centers or what products should be
produced at a specific manufacturing plant.
 Functional: Any strategy should review how each separate
function in the logistics organization is to achieve functional
excellence.
 Implementation: The key to developing a successful logistics
strategy is how it is to be implemented across the organization.
The plan for implementation will include development or
configuration of an information system, introduction of new
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 policies and procedures and the development of a change
management plan.
A logistics strategy consists of a set of aims, procedures, structures,
facilities, beliefs, systems, and so on. These are typically presented in a
logistics plan. This plan might contain many parts, with the following
list including the most common.
● a broad summary, giving an overview of the logistics strategy
and how this relates to other parts of the organisation
● the aims of logistics within the organisation, what performance
levels are needed and how these can be measured
● a description of the way that logistics as a whole will achieve
these aims, what changes are involved and how these will be managed
● a description of how the separate functions of logistics
(procurement, transport, inventory control, materials handling, and so
on) will contribute to the plan, the changes involved and how operations
can be integrated
● projections to show the resources needed by the strategy
● projections of the costs and financial performance
● a description of the way that this strategy affects the rest of the
business, particularly in terms of performance achieved and contribution
to customer value and satisfaction.
To conclude the first point of the lecture plan one can mention that
logistics strategy forms a link between the more abstract, higher
strategies and the detailed operations of the supply chain.

2. Logistic objectives
The goal of any formal logistics strategy is to make sure a
company is delivering to its customers what they want. And delivering
to them when they want it. And accomplish all of that by spending as
little money as possible.
By following these guidelines, a company can ensure that its
logistics are aligned with its customers' needs, company's inventory
targets and cost reduction goals.
In other words it is suggested that any logistics strategy has three
(3) objectives:
• Cost reduction
• Capital reduction
• Service improvement

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 Not all of these objectives can be achieved simultaneously since
they may be in conflict. For example, minimizing costs and
simultaneously maximizing service are incompatible.
Often, the Service improvement is set at a target value. Because
exactly this condition is important for customers. At this point, the main
logistics objective may become one of minimizing costs subject to
meeting the desired service level rather than profit maximization or
return on investment.
More detailed description and sample issues for each logistics
objective you can find in the table 1.

For the quantitative evaluation of the logistics objectives the index

ROLA is applied. The ROLA index is depicted in the Figure 3.

Figure 3 - The ROLA index

The contribution to revenue refers to the sales resulting from the

logistics system design. Logistics operating costs are the expenses
incurred to provide the level of logistics customer service needed to

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generate sales. Logistics assets are the capital investments made in the
logistics system. ROLA is to be maximized over time.

3. Levels of logistics planning.

Logistics planning decide what, when, how in three levels:
• Strategic – long range > 1 year
• Tactical - < 1 year
• Operational – frequently on hourly or daily basis

● Strategic decisions are most important and set the overall

direction of the organisation; they have effects over the long term,
involve many resources and are the most risky.
● Tactical decisions are concerned with implementing the
strategies over the medium term; they look at more detail, involve fewer
resources and some risk
● Operational decisions are the most detailed and concern
activities over the short term; they involve few resources and little risk.
Examples of Strategic, Tactical, and Operational Decisions for
some logistics activities are presented in the table 2.

Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equipment Dispatching
leasing
Inventories Location, Safety stock levels Order filling
Control policies
Order Order entry, transmittal, Processing orders,
processing and processing system Filling back orders
design
Purchasing Development of supplier- Contracting, Expediting
buyer relations Forward buying
Warehousing Handling equipment Space utilization Order picking and
selection, Layout design restocking
Facility Number, size, and
location location of warehouses

4. Strategic logistics planning

Different firms have different process of strategy formulation an
implementation, but in common the process of strategic logistics
planning has the following steps. They are depicted in the figure 4.

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 Figure 4 - The process of strategic logistics planning

1. Analyzing the external and internal environment, which will

help to determine the resource requirements, limitations and any other
factors.
2. The environmental analysis identifies the company’s strengths,
weaknesses, opportunities and threats in customer service, needed for
SWOT analysis.
3. SWOT enables in formulating the appropriate resources and the
logistics mix or resources required for achievement of organizational
goals.
4. A structural design is needed to implement the strategy. The
primary concern here is the strategic planning of warehouses;
transportation and information flow in the entire supply chain. A proper
interface between channel structure of the firm and its logistical network
can be done with the help of a structural design. The efficiency of the
functional elements in the movement of information and inventory
across the supply chain will influence the success of the strategy
implementation.

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 5. Selection of transportation route, mode and carrier operator is a
key aspect for offering and maintaining a reliable and consistent service
level.
6. The role of material procurement and management also cannot
be ignored
7. Implementing the strategy is absolutely important and its
success depends on efficiency of the human resources, equipment and
the interfaces involved. A major task at the level of operation are order
registration, processing, picking, replenishment and dispatching.
Thus, the process of strategic logistics planning will improve the
overall responsiveness of the organization.
The areas of strategic logistics planning:
• Customer service levels
• Facility location
• Inventory decisions
• Transportation decisions
They are called together the logistics strategy triangle.
The three strategies are in tradeoff with each other. That is, a good
location strategy is dependent on the manner in which inventories are
managed and on the resulting inventory levels, and on the transportation
service selected. Inventory levels are dependent on the number and
location of facilities as well as the transportation service selected. And
so the interdependence goes. Hence, a triangle of logistics strategy.

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 Figure 5 - The Logistics Strategy Planning Triangle

PRODUCTION ( LOCATION ):
Fundamental logistics questions are: (1) when should a resource be
produced; and (2) where should a resource be produced.
The “when” question includes the topics of aggregate resource
planning, and production scheduling.
The “where” question includes the topics of facility location and
production allocation.
Some of the important production questions are:
(a) What outside source should be used to supply a part?
(b) Where should a new facility be built?
(c) When should a facility produce different items, taking into
account:
• Seasonal demand patterns?
• Demand uncertainty?
• Cost of operating single, double, triple shifts?
• Labor costs?
(d) When should a firm use two or more sources for a part?
INVENTORY:
Fundamental logistics questions are (1) when should a resource
(material, machine or labor) be put in inventory and taken out of
inventory; and (2) where should a resource be stored.
The “when” question includes the general topics of economic-
order-quantity models, safety stock models and seasonal models, and
specialized topics of fleet management, and personnel planning.
The “where” questions includes the topic of inventory echelons.
Some of the important inventory questions are:
(a) How much does it cost to store resources in inventory?
(b) How much “safety stock” should be carried in inventory to
prevent against running out of a resource?
(c) How much inventory should be carried in order to smooth out
seasonal variations in demand?
(d) Where should replacement parts be stored in multi-echelon
inventory system?
TRANSPORTATION:
Fundamental logistics are: (1) where should resources be moved
to, and by what mode and route; (2) when should resources be moved.

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 The “where” question includes the topics of terminal location,
vehicle routing, and shortest path methods and network flow allocation.
The “when” question includes the topic of distribution rules.
Some of the important questions are:
(a) When should shipment be sent through terminals, and when
should shipment be sent direct?
(b) Which, and how many, terminals should shipments be sent
through?
(c) What are the best vehicle routes?
(d) When should a vehicle be dispatched over a route?

5. Basic logistics strategies

Each organization designs its own logistics strategy, but they often
move along similar lines. The logistics strategies of Ford and
Volkswagen, for instance, are broadly similar, as are the strategies of
Lufthansa and Air France.
The basic logistics strategies include the following:
1. Cost Leadership: Achieving cost leadership is facilitated by
logistics cost reduction to a major extent. This can be achieved by many
ways. Examples of achieving logistics cost reduction are:
 Reducing transaction costs through IT support
 Warehouse operations based on scale economics
 JIT, cross docking and postponement, which results in
reduction of inventory and related costs.
 Reduced vendor base and co-partnerships with suppliers.
2. Differentiation: This strategy focuses on offering superior
service. Examples of offering logistics services for differentiation:
 On time and consistent delivery
 Logistics solutions to suit individual requirements
 Tracking consignments
3. Collaboration: A strategy where the customer works in
collaboration with the suppliers. An example here is Vendor Managed
Inventory (VMI). In VMI, customer places no orders but instead shares
information with the vendor. This information relates to actual usage or
sales of their product, their current on hand inventory and details of
additional marketing activity. On the basis of this information, the
supplier takes responsibility for replenishment of the customer
inventory.

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 4. Diversification: Firms having a lot of operations adopt this
strategy. The basic objective here is the lower cost and better control
over operations thus providing superior customer service.
5. Outsourcing: Outsourcing services to logistics service providers
having expertise in this area in order to bring efficiency and
effectiveness into the logistics operations. An example in outsourcing is
Customs Clearance service providers. As a majority of exporters and
importers do not have a proper expertise in this area of logistics
operations, many logistics service providers offer customs clearance
services to their clients. This can reduce the overall transaction cost.

6) Lean and agile logistics strategies.

A lean logistics strategy works best in high volume, low variety

and predictable environments, whereas an agile logistics strategy is
needed in a less predictable environment where the demand for variety is
high.
According with basic logistics strategies organizations with a focus
on lean logistics are aiming at low costs; those with a focus on agile
logistics are aiming at high customer satisfaction.
Lean strategies
No organization can completely avoid the cost of logistics, so the
aim can be to make it as cheap as possible. Then a reasonable objective
is to minimize the total cost of logistics, while ensuring acceptable levels
of customer service. This approach is generalized into LEAN
LOGISTICS.
The aims of a LEAN STRATEGY are to do every operation using
less of each resource – people, space, stock, equipment, time, and so on.
It organizes the efficient flow of materials to eliminate waste, give the
shortest lead time, minimum stocks and minimum total cost.
Early work on lean operations was done in the motor industry, led
by Toyota. This work concentrated on ‘lean production’ but the methods
got such good results that they spread into other areas, eventually
developing a ‘lean enterprise’.
Robert Townsend says that, “All organizations are at least 50%
waste – waste people, waste effort, waste space and waste time.” During
their development work Toyota identified the following areas of the
supply chain where this waste is most likely to occur:
• Quality

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 • Wrong production level or capacity
• Poor process
• Waiting
• Movement
• Stock
A lean strategy looks for ways of eliminating this waste. The
typical approach does a detailed analysis of current operations, and then
removes operations that add no value, eliminates delays, simplifies
movements, reduces complexity, uses higher technology to increase
efficiency, looks for economies of scale, locates near to customers to
save travel, and removes unnecessary links from the supply chain.
But you should understand that low costs do not automatically
mean lean operations. Lean operations do not just minimize costs; they
maintain customer service while using fewer resources. It’s suggested
that lean operations might work in the mass production car industry, but
they cannot be transferred to any other supply chain. For example, lean
operations might not work in variable and uncertain conditions.
Agile strategy
An alternative is more flexible strategy based on agility.
An agile strategy concentrates on the other side of the ‘efficient
versus responsive’ – or lean versus agile – debate. Its supporters say that
lean operations put too much emphasis on costs, and cannot deal with
changing conditions, increasing competition, or more sophisticated and
demanding customers. If demand for a product is steady at 100 units a
week, lean logistics will remove all the waste and have enough capacity
to deliver these 100 units. Unfortunately, if demand suddenly rises to
110 units, lean operations cannot cope. As markets are demanding more
variety and customization, logistics should be more flexible.
The aim of an AGILE STRATEGY is to give a high customer
service by responding quickly to different or changing circumstances. Its
supporters say that lean operations put too much emphasis on costs, and
cannot deal with changing conditions, increasing competition, or more
demanding customers.
There are two aspects of agility.
• First, is the speed of reaction - agile organizations keep a close
check on customer demands and react quickly to changes.
• Second, is the ability to tailor logistics to demands from individual
customers. The end-customer satisfaction is a prime concern even
if this comes at somewhat higher price.

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 These are, of course, different aspects of customer service, and the
implication is that end-customer satisfaction is a prime concern, even if
this comes at somewhat higher price.
Organizations that put a lot of emphasis on customer satisfaction
are said to have a customer focus. The justification for this strategy
comes from the obvious importance of customers. Without customers an
organization has no sales, no income, no profit, no business – and soon
no organization.
Organizations with a customer focus will typically:
● aim for complete customer satisfaction
● allow customers easy access to the organization
● find exactly what they want
● design logistics to meet, or exceed, these demands
● be flexible and respond quickly to changing customer demands
● get a reputation for outstanding quality and value
● do after-sales checks to make sure the customers remain satisfied
● look outwards so that they are always in touch with customers,
potential customers, competitors, and so on.
Comparison of the features of lean and agile strategies presented in
the table 5.
At first sight the aims of lean and agile operations seem
contradictory. One looks to minimize costs, and sees customer service as
a constraint; the other looks to maximize customer service, and sees
costs as a constraint. This seems to lead to important differences.
In practice, of course, there is not such a clear divide between the
two strategies. Lean and agile logistics strategies can be integrated in a
variety of ways. They can be linked to evolve a new manufacturing
paradigm under the name „leagile‟.

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 Table 5 - LEAN versus AGILE

A strategy can be defined as leagile if the advantages of leanness

and agility are combined. A leagile logistics strategy aims to infuse
competitiveness in an organization in a cost-effective manner. For
example, if a supplier improves EDI links with its customers, it can both
reduce costs and increase customer service – becoming both leaner and
more agile. Similarly, a manufacturer selling materials through a website
and a wholesaler introducing cross-docking become both leaner and
more agile.
By employing a leagile supply chain strategy, an organisation can
ensure that it will minimise cost and maintain stability while being
flexible and responsive to customer demand. This will lead to
competitive advantage through innovation, cost, service and quality.

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