About the courseThis course develops the concepts and tools used by people who work with supply chain and logistics: inventory management, demand forecasting, purchasing (public and private), stockrooms, warehousing, distribution and transportation. It grew out of the Logistics I and II classes I taught in the technical Business Administration program at CEFET/RJ, in Brazil, and was rewritten for self-study: each lesson brings the theory, worked examples and questions with answers.The series has two parts. The first covers inventory management: inventory policy and indicators, types of inventory, demand forecasting, costs, economic order quantity, safety stock, replenishment models, ABC classification and inventory valuation. The second covers purchasing, public procurement, warehousing and transportation.Recommended textbook:GONÇALVES, Paulo Sérgio. Administração de materiais (Materials Management). Rio de Janeiro: Elsevier.Further reading:CONTADOR, J. C. Gestão de Operações (Operations Management). São Paulo: Edgard Blücher.CORRÊA, H. L.; GIANESI, I. G. N.; CAON, M. Planejamento, programação e controle da produção: MRP II/ERP (Production planning and control: MRP II/ERP). São Paulo: Atlas.Introduction“Managing materials is an activity that has been carried out in companies since the beginnings of management. It gained great momentum when logistics extended far beyond the boundaries of companies, with the main objective of meeting customers' needs and expectations”- GONÇALVES, PauloIn this first lesson we will see where logistics comes from, how it evolved into supply chain management, and why companies started to treat suppliers, factories, warehouses and stores as parts of a single system.A brief history of logisticsThe military originThe word logistics comes from the French logistique, related to loger (to lodge): in armies, it was the art of moving, lodging and supplying troops. The Swiss general and military theorist Antoine-Henri Jomini, in his Précis de l'art de la guerre (1838), treated logistics as one of the branches of the art of war, alongside strategy and tactics. The idea is simple and still holds: the best plan is useless if fuel, food and ammunition do not reach the right place at the right time.World War II took this to an unprecedented scale. Supplying battlefronts on several continents required mass planning of transportation, warehousing and inventory, and much of what was learned there (including the quantitative methods of operations research) moved into companies after the war.From physical distribution to integrated logisticsIn the 1950s and 1960s, companies handled each activity separately: purchasing cared about buying cheap, production about producing in large batches, transportation about filling the truck, sales about having product on the shelf. This is the fragmentation phase. The first major professional association in the field, founded in the United States in 1963, was called precisely the National Council of Physical Distribution Management.Gradually, companies realized that each department, by optimizing only its own cost, made the others' costs worse: the factory's large batch filled the warehouse, the cheap freight delayed delivery, and so on. The 1980s brought partial integration (materials management on one side, physical distribution on the other) and, from the 2000s on, total integration, or integrated logistics. The same association changed its name twice, following this evolution: it became the Council of Logistics Management in 1985 and, in 2005, the Council of Supply Chain Management Professionals (CSCMP). In the next lesson we will see this evolution in a figure.The 1980s and the birth of supply chain managementIn the 1980s, companies adopted new technologies and manufacturing strategies to reduce costs and compete in different markets: just-in-time production, kanban, lean manufacturing, total quality management. Large resources were invested in these initiatives. Over time, however, it became clear that many companies had already cut manufacturing costs close to the limit, and that the next step to increase profit and market share lay outside the factory: in the relationship with suppliers, distributors and customers. [3]The expression supply chain management reached the public in 1982, in an interview given by consultant Keith Oliver, of Booz Allen Hamilton, to the British newspaper Financial Times. In the 1990s the concept spread, together with electronic data interchange between companies; the 2000s brought enterprise resource planning systems (ERP), e-commerce and real-time tracking. And the supply disruptions during the covid-19 pandemic showed the general public what professionals in the field already knew: a chain is only as strong as its weakest link.Which change marks the transition from fragmented logistics to integrated logistics?Answer: Treating purchasing, inventory, production and distribution as a single system, seeking the lowest total cost instead of the lowest cost for each department — in the fragmented phase each department optimizes its own cost and pushes problems onto the others. Computerizing or outsourcing may help, but that is not what defines integration.Supply chainGlobal competition, with products whose life cycles keep getting shorter and consumers who keep getting more demanding, made companies turn their attention to the supply chain. In a typical chain, raw materials and finished products are made in different places, shipped to distribution centers and then sent to retailers or consumers. That is why, to reduce costs and improve service, a good supply chain strategy studies the interactions among all these levels. [2]A definition of supply chain management:“Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize systemwide costs while satisfying service level requirements”- SIMCHI-LEVI et al.Several definitions appeared as the concept gained popularity. The APICS Dictionary (from the American production and inventory management association, which in 2018 renamed itself the Association for Supply Chain Management, ASCM) describes the supply chain as: [3]the processes from the initial raw materials to the ultimate consumption of the finished product, linking across supplier-user companies; andthe functions within and outside a company that enable the value chain to make products and provide services to the customer.Note the difference between the two terms: logistics plans and controls the flow and storage of materials, products and information from the point of origin to the point of consumption; supply chain management is broader, because it coordinates several companies (suppliers' suppliers, manufacturers, distributors, retailers) and includes decisions such as supplier development, purchasing and partnerships. Logistics is a part, and a huge part, of supply chain management.Why study this? Because materials weigh heavily on the budget. Based on a survey published by the Brazilian newspaper Gazeta Mercantil in 1991, Gonçalves shows that more than 50% of the costs of an industrial company were in materials and services used in production. [1] Every unit of currency saved in purchasing, storing or transporting these materials goes straight to the bottom line.Breakdown of an industrial company's costs: materials and services are the largest share. Source: IbmecTEC handoutWhat the supply chain is notSupply chain management is not limited to any of the items below, although it includes several of them: [3]inventory management;logistics management;supplier partnerships;a shipping strategy;distribution management;the logistics channel;contract management;a computer system.Anyone who buys management software and says they now have supply chain management is confusing the tool with the work of coordinating companies.What hinders good supply chain managementThe most common obstacles are: [3]lack of guidelines for creating alliances with supply chain partners;lack of measures to monitor these alliances;a narrow view that sees the chain only as purchasing or product distribution, without including the broader business processes;inability to integrate the company's own internal procedures;lack of trust inside and outside the company;organizational resistance to the concept;lack of buy-in from top executives;lack of integrated information systems and electronic commerce linking the companies.A store chain started shipping goods only in full trucks and cut freight costs by 15%. Six months later, store inventories had doubled and stockouts had increased. According to the supply chain concept, what happened?Answer: The company optimized an isolated link and worsened total cost and customer service — waiting for the truck to be full means less frequent deliveries and larger batches, which increases inventory and the risk of stockouts. It is the typical mistake of fragmented logistics.Cases that made historyThe textile industry and quick responseFacing strong international competition in textiles and apparel, leaders of the American industry created the Crafted With Pride in USA Council in 1984. In 1985 the consulting firm Kurt Salmon Associates was hired to analyze the industry's supply chain. The result was striking: from raw material to consumer, the apparel chain took 66 weeks, 40 weeks of which were spent in warehouses or in transit. Such a long chain caused large losses, both from the cost of financing all that inventory and from not having the right product in the right place at the right time. [3]The study gave rise to the Quick Response (QR) strategy: a partnership in which retailers and suppliers work together, sharing information, to respond faster to what consumers buy. Important changes followed: retail adopted UPC bar codes, companies created standards for electronic data interchange (EDI) among themselves, and retailers installed point-of-sale (POS) systems that pass sales data quickly to distributors and manufacturers.Bar code: the scan at the checkout became sales information for the whole chainA similar idea later reached supermarkets under the name Efficient Consumer Response (ECR), studied by the same consulting firm. [4]Hewlett-PackardHP changed the physical distribution of its products and implemented a distribution requirements planning (DRP) system. DRP combines customer orders with demand forecasts and serves as the starting point to pull the supply chain: demand triggers replenishment, instead of factory capacity pushing product out. [5]Walmart and vendor managed inventoryWalmart launched its own initiative by working directly with key manufacturers. In this model, called VMI (Vendor Managed Inventory), the manufacturer receives the retailer's sales and inventory data and becomes responsible for replenishing the inventory in Walmart's warehouse. In return, Walmart expects order fill rates close to 100% on those products. Kmart and other large retailers implemented similar models. [6]Be careful not to confuse VMI with a marketplace. When a retail website lets you choose among several sellers for the same product, that is a marketplace: partner merchants sell through the platform, often from their own inventory. In VMI, the supplier manages the retailer's inventory, based on shared information.In the study of the American apparel chain, the product took 66 weeks from raw material to consumer, 40 of which in warehouses or in transit. Roughly what share of the total time did the product spend sitting in a warehouse or moving?Answer: About 61% — 40 ÷ 66 ≈ 0.61. More than half of the chain's time added nothing to the product, and that is where quick response could gain.In the VMI model, who decides when and how much to replenish the retailer's inventory?Answer: The supplier, based on the sales and inventory data the retailer shares — that is what the name says: vendor managed inventory. Without shared information VMI does not work.ConclusionTo start managing the supply chain as a whole, companies should consider the following guidelines in their plans: [3]link the supply chain strategy to the overall business strategy, so that supply chain initiatives serve the company's goals;define the chain's objectives and make sure each process, individually, is able to meet them;create systems to listen to market demand signals and plan accordingly, including changes in order patterns and in demand caused by customer promotions;manage sources of supply, developing partnerships with suppliers to reduce material costs and receive materials when they are needed;design logistics networks tailored to each customer segment;have an information systems strategy that supports decisions at every level of the chain and gives a clear view of the flow of products.In the next lesson we go inside the company: how materials management is organized, which areas make it up and how it interacts with the rest of the organization.References[1] GONÇALVES, Paulo Sérgio. Administração de materiais. Rio de Janeiro: Elsevier.[2] SIMCHI-LEVI, David; KAMINSKY, Philip; SIMCHI-LEVI, Edith. Designing and managing the supply chain: concepts, strategies and case studies. McGraw-Hill. Chapter 1, Introduction to supply chain management.[3] LUMMUS, Rhonda R.; VOKURKA, Robert J. Defining supply chain management: a historical perspective and practical guidelines. Industrial Management & Data Systems, v. 99, n. 1, p. 11-17, 1999.[4] KURT SALMON ASSOCIATES. Efficient Consumer Response: enhancing consumer value in the grocery industry. Washington, DC: Food Marketing Institute, 1993.[5] HAMMEL, T. R.; KOPCZAK, L. R. Tightening the supply chain. Production and Inventory Management Journal, v. 34, n. 2, p. 63-70, 1993.[6] JOHNSON, M. E.; DAVIS, T. Gaining an edge with supply chain management. APICS - The Performance Advantage, v. 5, n. 12, p. 26-31, 1995.ExercisesEasy1) What word does the term logistics come from, and what was its original meaning in armies?2) Explain, in two or three lines, the difference between logistics and supply chain management.3) Match each acronym to its meaning:a) VMIb) DRPc) QRd) ECR(1) quick response, a partnership between retailers and suppliers in the apparel sector; (2) vendor managed inventory; (3) efficient consumer response, the same idea applied to supermarkets; (4) distribution requirements planning.4) The professional association of the field, founded in the United States in 1963, changed its name twice. Put the three names in chronological order, with the years, and say what each change reveals about the evolution of logistics.5) A company director bought an enterprise management software package and announced: now we have supply chain management. What is wrong with this statement?Hard6) In the Kurt Salmon Associates study, the American apparel supply chain took 66 weeks from raw material to consumer, 40 of which were spent in warehouses or in transit.a) What percentage of the total time did the product spend sitting still or moving?b) If quick response cut only the time in warehouses and in transit by half, what would the new total time of the chain be?c) In this new chain, what percentage of the time would be warehouse and transit time?d) By what percentage would the total time of the chain fall?7) A manufacturer has annual revenue of R$ 10,000,000 and total costs of R$ 9,200,000, of which 55% are materials and services purchased for production.a) What is the current profit?b) If the company cuts its spending on materials by 5%, without changing sales, how much does profit increase, in reais and in percentage?c) Keeping the current profit margin on sales, how much more would the company have to sell to achieve the same profit increase?d) What does this result show about the importance of materials management?8) At a furniture factory, the purchasing department started buying MDF boards in six-month lots to get an 8% discount; production started making each model in large batches so as not to stop the machines; and transportation only ships full trucks. At the end of the year, each department's cost had fallen, but the company's profit decreased and the stores complained about delays. Explain what happened using the concepts of fragmented logistics and integrated logistics, and propose a way to decide these three matters together.9) Classify each situation as VMI, marketplace or neither, and justify:a) a pharmacy chain sends the diaper manufacturer the daily sales and inventory of each store, and the manufacturer decides how much to deliver and when;b) on a retail website, the same blender appears with five prices, from five different stores, each with its own inventory;c) every Monday, a supermarket places its soft drink order with the distributor, based on what is left on the shelf;d) an automaker's screw supplier monitors the automaker's inventory through the system and replenishes automatically when it reaches an agreed level.Answer key1) Logistics comes from the French logistique, related to loger (to lodge). In armies, it was the art of moving, lodging and supplying troops: getting fuel, food and ammunition to the right place at the right time. Jomini, in 1838, treated logistics as a branch of the art of war, alongside strategy and tactics.2) Logistics plans and controls the flow and storage of materials, products and information, from the point of origin to the point of consumption. Supply chain management is broader: it coordinates several companies (suppliers' suppliers, manufacturers, distributors, retailers) and includes decisions such as supplier development, purchasing and partnerships. Logistics is one part of supply chain management.3) a) VMI = (2) vendor managed inventory; b) DRP = (4) distribution requirements planning; c) QR = (1) quick response; d) ECR = (3) efficient consumer response.4) National Council of Physical Distribution Management (1963) → Council of Logistics Management (1985) → Council of Supply Chain Management Professionals, CSCMP (2005). The first name speaks only of physical distribution, the phase in which each activity was handled separately; the second reflects the integration of activities into logistics; the third recognizes that coordination came to include several companies, the supply chain.5) He confused the tool with the work. Supply chain management is not just an information system: it is the coordination of suppliers, manufacturers, warehouses and stores so that the right product reaches the right place at the right time, at the lowest total cost. The system helps (the lack of integrated systems is one of the obstacles), but without alliances with partners, indicators, trust and support from top management there is no supply chain management.6) a) 40 ÷ 66 ≈ 0.606, or about 61% of the time.b) Idle time falls from 40 to 40 ÷ 2 = 20 weeks; the rest of the chain still takes 66 − 40 = 26 weeks. New total: 26 + 20 = 46 weeks.c) 20 ÷ 46 ≈ 0.435, or about 43%.d) The reduction is 66 − 46 = 20 weeks; 20 ÷ 66 ≈ 0.303, or about 30% less.7) a) Profit = 10,000,000 − 9,200,000 = R$ 800,000, a margin of 800,000 ÷ 10,000,000 = 8% on sales.b) Materials = 55% × 9,200,000 = R$ 5,060,000. A 5% reduction is worth 5,060,000 × 0.05 = R$ 253,000, which goes straight to profit: 253,000 ÷ 800,000 ≈ 31.6% more profit.c) With an 8% margin, each extra real of sales brings R$ 0.08 of profit. To earn R$ 253,000: 253,000 ÷ 0.08 = R$ 3,162,500 more in sales, an increase of about 31.6% in revenue.d) Saving 5% on purchases has the same effect on profit as selling almost a third more, which is usually much harder. Since materials make up more than half of costs, managing them well is one of the company's strongest profit levers.8) This is the typical case of fragmented logistics: each department optimized its own cost and passed the problem on to the others. The six-month lot of MDF and the large production batches filled the warehouse and tied up capital (the cost of holding inventory may have eaten up the 8% discount); making each model in a large batch causes shortages of the other models; and waiting for the truck to be full spaces out deliveries, which caused the delays. In integrated logistics the three decisions are made together, seeking the lowest total cost and the desired service level: for example, a committee or a person responsible for the chain compares, for each alternative, the discount gained with the cost of holding the extra inventory, the cost of setting up the machines with the cost of finished goods inventory, and the freight saved with the cost of delays and lost sales. The lessons on inventory costs and economic order quantity show how to do these calculations.9) a) VMI: the pharmacy shares sales and inventory, and the supplier decides on replenishment.b) Marketplace: different retailers sell through the same platform, each with its own inventory; nobody is managing another company's inventory.c) Neither: this is traditional replenishment, in which the retailer itself decides how much to order.d) VMI: the supplier monitors the customer's inventory and decides on replenishment based on an agreed level.
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