Supply Chain and Logistics 101: Concepts, Technology, Sustainability, and Fundamentals

Supply Chain and Logistics, complex yet indispensable processes that play a vital role in today’s business world. The supply chain and logistics manage the journey of products from the production stage to the consumer, and they are increasingly evolving under the influence of technology. However, understanding the supply chain and logistics areas independently of technology — in their raw state as technology gradually influences them — is of critical importance to comprehend developments and potentials in this field.

A few years ago, as a high school student in the field of Information Technologies, I became aware of the potential of the FreightTech sector through a news article and took action to build my future in that direction. In order to observe the technology-free, primitive state of logistics, I interned at an Africa-based Freight Forwarder company and then turned to the field of Product Management with the idea of adding innovative solutions/products to this sector. I interned as a Product Owner to experience a start-up environment.

In this article, I aim to provide an introductory framework to the supply chain and logistics areas by briefly touching on basic concepts, technology, and sustainability. I will continue my writings with articles about FreightTech (FreightTech is a sector that offers innovative solutions optimizing transportation and cargo management through the effective use of information technologies in the supply chain and logistics industries.) and conclude my articles related to raw supply chain and logistics with this 101-level piece.

Basic Concepts:

Logistics:
Logistics is a discipline that manages the processes from the production of goods and services to their delivery to consumers. It includes elements such as storage, transportation, and material flow.

Supply Chain:
The supply chain encompasses processes from the production of a product to its delivery to the consumer. The discipline that is concerned with coordinating and optimizing these processes is called supply chain management.

Retail:
Retail refers to the stage where products are sold directly to end consumers. Retailers form the final link in the supply chain and should not be confused with logistics.

Storage:
Storage involves receiving products/loads from specific points, preserving them for a certain period, and preparing them for delivery to specific points.

Key Players in International Logistics:

Transportation Companies:
Transportation companies play a crucial role in transporting products from one place to another, operating in various areas such as sea, air, land, and rail transportation.

Storage and Distribution Centers:
Storage and distribution centers manage the storage, organization, and delivery of products to consumers.

Customs and Import/Export Agencies:
Customs procedures and import/export regulations in international trade increase the complexity of logistics processes.

Role of Technology:

Artificial Intelligence (AI):

In logistics, Artificial Intelligence (AI) enhances operational processes effectively in areas such as data analysis, demand forecasting, routing optimization, and inventory management. AI has the potential to be a key technology that triggers significant transformation in the logistics sector by 2030, according to a McKinsey report.

For example, a logistics company can analyze past delivery data using machine learning algorithms. The algorithm, considering various factors (traffic conditions, weather, previous delivery times), can more accurately predict future delivery times.

Internet of Things (IoT):

The Internet of Things (IoT) refers to the technology that enables physical devices to communicate with each other over the internet. This allows devices to collect, share, and interact with each other’s data.

For instance, a warehouse can track inventory in real-time using IoT sensors. These sensors continuously report the quantity of a product on the shelf, enabling warehouse managers to manage inventory more efficiently.

Robotics and Automation:

Robotics and automation involve the use of programmed machines to perform physical tasks, automating processes to increase efficiency and speed.

For example, a large warehouse can expedite packaging processes using automated robot arms. These robots perform accurate packaging tasks, reducing the workload on human labor.

Big Data and Data Analytics:

Big Data and data analytics are technologies aimed at examining large and complex data sets to extract meaningful insights.

For instance, a logistics company can examine past sales data using big data analytics. This analysis helps them understand demand trends during a specific period, allowing for more accurate determination of future inventory levels and distribution plans.

Sustainability:

Sustainability in the Supply Chain refers to an approach that aims to minimize the environmental, social, and economic impacts of supply chain processes. It focuses on factors such as energy efficiency, reducing carbon footprints, waste management, and ensuring fair working conditions. Sustainable logistics aims to create a supply chain that causes less harm to both the environment and society by adopting greener and ethical practices. This involves using materials and energy in accordance with environmental sustainability principles while ensuring fair and safe working conditions for employees. These efforts enhance the reputation of logistics businesses embracing sustainability principles in the long term and support the mission of leaving a more livable world for future generations.

Supply Chain and International Logistics 101

The Importance of the Supply Chain

The supply chain is a process that adds value to a product. This value increases, especially with factors such as delivery speed. “Supply chains compete, not individual companies.”

What is Supply Chain Management?

Supply chain management is the management of an interactive network between businesses. This comprehensive management process includes the following:

1. Supply chain organization and design
2. Forecasting
3. Demand management
4. Inventory management
5. Customer and supplier relationships
6. Measuring performance

Product and Service Flow

The supply chain manages the flow of products and services. This flow extends from raw materials to work in progress (WIP) and ultimately to finished goods. This process takes shape in several stages and has a dynamic structure with the involvement of many stakeholders.

Supply Chain System

Supply chain management should focus on specific stages for a business to sustain its competitive advantage and enhance customer satisfaction. The stages of a supply chain are as follows:

1. Supplier and Material Procurement Stage: This marks the beginning of the supply chain, where raw materials and necessary supplies are procured. Factors such as supplier selection, material quality, and supply lead time are crucial at this stage.
2. Production Stage: This stage in the supply chain involves the processing of raw materials and the manufacturing of products. Production planning, capacity management, and quality control play critical roles at this stage.
3. Distribution Stage: Encompassing the storage, packaging, and transportation of products, this stage ensures the delivery of products to consumers. Warehouse management, logistics planning, and distribution strategies are important in this stage.
4. Retail and Sales Stage: This is the phase where products are presented for retail sales. Sales strategies, inventory management, and customer relationships are of critical importance at this stage.
5. Customer Services and Support Stage: Post-sales services, addressing customer inquiries, and ensuring customer satisfaction fall under this stage. Return management and customer feedback are integral parts of this process.
6. Recycling and Waste Management Stage: When products reach the end of their life cycle or become obsolete, recycling and waste management processes come into play. Environmental sustainability and waste reduction are prominent concerns at this stage.

Supply Chain Objectives

The fundamental objectives of supply chain management encompass critical elements that determine a business’s overall success. These objectives include:

1. Right Product: The supply chain should be designed to provide the correct products that align with customer demands, thereby increasing customer satisfaction.
2. Right Place: It is crucial to place products in the right locations timely and without errors to best meet customer demands.
3. Right Quantity: Properly managing stock levels and maintaining appropriate quantities of products in line with demands reduces costs and enhances customer satisfaction.
4. Right Quality: Supply chain processes should aim to preserve and improve product quality, as high-quality products build customer trust.
5. Right Time: Delivering products to customers at the right time based on demand increases customer satisfaction and loyalty.
6. Right Cost: Supply chain processes should aim to minimize costs and increase efficiency. Effective cost management strengthens the business’s competitive advantage.

Key Activities in the Supply Chain

Supply chain management involves a series of key activities aiming to integrate business processes seamlessly:

1. Order Planning and Recording: Involves demand forecasts and order management processes. Accurate planning optimizes stock levels.
2. Procurement/Purchasing: Ensures the acquisition of necessary materials and services within the supply chain.
3. Manufacturing: Plans and manages production processes, contributing to efficient production and stock management.
4. Acceptance/Quality: Encompasses the acceptance of incoming materials and quality control processes, enabling the production of high-quality goods.
5. Logistics: Manages the storage, transportation, and distribution processes of products, facilitating the physical flow of the supply chain.
6. Customer Service and Support: Responds quickly and effectively to customer needs, enhancing customer satisfaction.
7. Accounts/Invoices: Manages financial transactions, ensuring the regular and accurate tracking of financial processes.

Objectives of the Supply Chain

The primary objective of supply chain management is to focus on specific goals for a business to sustain its competitive advantage and enhance customer satisfaction. Here are the main objectives of a well-functioning supply chain:

1. Providing What the Customer Wants: A good supply chain should understand customer demands accurately and be designed to meet these demands. The product or service should exceed customer expectations, thereby increasing customer satisfaction.
2. Availability of Stock: An effective supply chain should manage stock levels accurately and ensure that products are consistently available. This means having the ability to respond quickly to demand.
3. Flexibility: The supply chain should adapt to changing market conditions and demand fluctuations. Flexibility should manifest in factors such as product quantities, distribution locations, and product variety.
4. Efficiency: The aim is to optimize business processes by using resources effectively. Increasing efficiency in areas such as labor, energy, storage space, and equipment usage can reduce costs.
5. Collaborations: Collaborations within the supply chain, strengthening interactions between suppliers, manufacturers, and distributors, are crucial. Effective partnerships, resource sharing, and increased information flow enhance the overall efficiency of the supply chain.
6. Responsiveness to Customer Demands: Customer demands can change over time, and it is essential to respond quickly to these changes. Demand forecasting models and flexible production processes can increase responsiveness to customer demands.
7. Quick Order Fulfillment: Responding rapidly to customer requests is a significant factor determining the success of the supply chain. Quick order fulfillment increases customer satisfaction and provides a competitive advantage.

Supply Chain Stakeholders and Relationships

The primary stakeholders in the supply chain include:

1. Supplier: Organizations that provide inputs to a business.
2. Manufacturer: Organizations that create a product or service by taking inputs.
3. Distributor / Wholesaler: Organizations that purchase inventory in bulk and sell it to other retailers or customers.
4. Retailer: Organizations that sell products to final customers.
5. Customer: The end customers who truly need a product or service and are interconnected with all these businesses.

Supply Chain Components

Terms:

• OEM (Original Equipment Manufacturer): An original equipment manufacturer is a manufacturing company that produces parts, equipment, or other products for another company. For example, when Acme produces computer cables for IBM, Acme becomes the “original equipment manufacturer” for IBM.
• VAR (Value Added Reseller): A value-added reseller is a company that enhances the value of third-party products by adding specific products or services and sells them to end-users for resale. Value-added resellers play a significant role in the information technology (IT) industry, providing additional hardware, installation services, consulting, troubleshooting, or other related products and services on top of core products.

Internal Functions:

• Purchasing / Procurement: Involves acquiring necessary materials and services.
• Quality Assurance: Ensures the compliance of products and services with established standards.
• Warehouse / Logistics / Dispatch: Manages the storage, transportation, and shipment processes of products.
• Production Planning and Control: Plans and manages production processes.

External Flow Functions:

• Distribution: Ensures the distribution of products to specific points.
• Logistics: Manages transportation and storage processes.
• Freight Forwarding (International Cargo Transportation): Manages the transportation of products and customs processes.
• Customs Handling: Handles the customs processes of products.
• Shipping Safety: Ensures the safe transportation of products.
• Customer Liaison: Responds quickly and effectively to customer needs.
• Warehousing: Manages product storage processes.
• Specialist Storage Providers: Meets specific specialized storage needs.
• Climate, Security, Traceability: Ensures the storage conditions, security, and traceability of products.

A Typical Supply Chain Example:

Types of Supply Chains

In supply chain management, there are two main types based on the marketing characteristics of products and services:

Functional Products and Innovative Products.

Functional Products

• Stable
• Predictable demand
• Long life cycle

Functional products have predictable demand, and they generally have a long product life cycle. Examples include household cleaning products like laundry detergent.

Innovative Products

• Unstable
• Unpredictable demand
• Short life cycle

Innovative products have unpredictable demand, and they usually have a short product life cycle. Examples include rapidly evolving products like technology items.

Different supply chain strategies should be employed for these two types of products.

Efficient Supply Chain

• Low distribution and fulfillment costs
• High utilization
• High repeatability (continuously transporting products to the same markets)
• Standard processes

Functional products typically require an efficient supply chain characterized by low costs, high efficiency, and repetitive standard processes.

Responsive Supply Chain

• Everything happens rapidly. High reaction speed.
• Speed is everything. High cost.
• Extra capacity is needed to cope with unknown demand.

Innovative products require a more responsive supply chain strategy, including the ability to respond quickly, high costs, and the capacity to deal with uncertain demand.

Matching Supply Chain Type with Product Type

Functional products like toilet paper should have effective supply chains. On the other hand, innovative products like new technology items should have a responsive supply chain.

Choosing a responsive supply chain for functional products or an efficient supply chain for innovative products can lead to issues. It can be costly if you choose a responsive supply chain for functional products. Conversely, it may not be suitable for the market if you choose an efficient supply chain for innovative products. Innovative products require high delivery speed, especially in fast-paced markets like fast fashion and the technology industry.

Value Stream Mapping

“The value stream mapping process allows you to create a detailed visualization of all steps in your business process. It represents how the flow of goods from supplier to customer occurs throughout your organization.

For example, the value offered by a software company to its customers includes software solutions and all features within it.

A value stream map illustrates all significant steps in your business process to deliver value from start to finish. It allows you to visualize every task your team works on and provides status reports on the progress of each task at a glance.”

Forecasting

We need forecasting because, essentially, we must know how much to purchase from suppliers. This is because it has a long lead time, often longer than the customer is willing to wait. Therefore, we should place orders in advance.

Forecasting Rules:

• Forecasting is never perfect: Because there are infinite factors, forecasting is never perfect. It cannot be perfect, but it is always useful. And we can make it more accurate.
• The farther into the future we forecast, the worse the forecast becomes: If you’re forecasting the next month, the result might be more realistic. If you’re forecasting the future, maybe 5 years, who knows? Uncertainty increases.

Collaborative Forecasting:

What

• Collaborating with your suppliers and customers
• Sharing raw data, market research, and opinions
• Creating a joint forecast prediction
• Sharing research and assumptions

Why

• Increasing the accuracy of forecasting
• Being closer to the real, ultimate demand

How

• Share your raw data, research, assumptions, and intentions
• Be open and ask questions
• Explain the same benefits to your customers/suppliers
• Conduct joint meetings with their sales department

Forecasting Methods

• Qualitative Methods — When there is no historical evidence, qualitative techniques are sufficient. These are subjective and based on the opinions and evaluations of consumers and experts. They are generally used to make moderate or long-term decisions.
• Quantitative Methods — Future data is determined using quantitative forecasting methods as a result of historical data. If there is historical numerical evidence, and it is fair to conclude that any feature in the data will continue in the future, these methods are appropriate.
• Moving Average — It is predicted that all future values will be equal to the average of previous data.
• Naive Method — The real data from the previous month is used as a projection for this period without attempting any correction or identifying causal factors. The Naive Method is used for economic and financial time series.
• Drift Method — Allowing forecasts to increase or decrease over time, the Drift Method is a variant of the naive process, and the amount of change (drift) over time is fixed to the average change observed in historical records.

Demand Management

Demand management in the supply chain involves predicting, planning, and meeting the demand for a company’s products or services. This management process should be effectively implemented at different stages of the supply chain, especially in inventory management, production planning, and logistics. Accurate demand management plays a significant role in optimizing inventory levels, increasing customer satisfaction, and making business processes more efficient. Techniques such as forecasting, market analysis, and effective planning are used to support demand management.

Causes of Demand Variability

• Seasonality
• Fashion
• Changes in customer income
• Sudden global changes
• Problems with other suppliers (our competitors)
• Marketing efforts / Promotions
• Random Variation

Bullwhip Effect in the Supply Chain

The bullwhip effect is a term that expresses how a small change in demand from customers can grow exponentially as it moves through the supply chain. This phenomenon occurs when a small change in demand from customers leads to increasingly amplified effects at all stages of the supply chain.

Why Does It Happen?

1. Delays: Delays in sharing information can lead to an absence of instant and accurate information between stages in the supply chain.
2. Uncertainty and Lack of Trust: Unreliability and lack of information in processes create the need for forecasting. This, in turn, leads to errors growing over time and the formation of more inventory.
3. Decision Discrepancy: The situation where decisions and orders taken at each stage of the supply chain are inconsistent with the actual status of product demands.

Inventory Management: Basic Information

Inventory includes products that a business plans to sell or use in the future. Inventory management involves effectively organizing, storing, and tracking these products. Inventories are typically categorized based on their types and functions.

Types of Inventory:

Categorized By Type:

1. Raw Materials (RM): Basic materials for production.
2. Work in Progress (WIP): Products in the production process.
3. Finished Goods Inventory (FGI): Products ready for sale.
4. Service/Support: Products used for service or support purposes.

Categorized By Function:

1. Cycle Inventory: Cycle inventory is the stock on hand and is usually determined based on your batch production quantity.
2. Safety Stock & Buffer Stock: Provides protection against uncertainties. For example, safety stock for raw materials to sustain production if the next delivery is delayed or buffer stock in front of a critical process.
3. Pipeline Inventory: Represents the raw materials purchased by a business, used to create finished products. When received, this inventory is labeled as an asset on a company’s balance sheet, termed as “work in process inventory,” and is designed and produced internally for the purpose of selling products to end-users.
4. Anticipation Inventory: Inventory consciously accumulated by companies in anticipation of future demand increases. For example, accumulating sunscreen inventory in winter to meet increased demand in summer.

Why Do We Hold Inventory?

1. Readiness for Sale: Products must be ready to meet customer demand.
2. Offering Choices to Customers (For Physical Stores): To provide a variety of products in stores.
3. Meeting Minimum Order Quantities: To meet minimum order quantities set by suppliers.
4. Time Lags: Time taken from purchasing products from suppliers to delivering them to customers.
5. Work in Progress Inventory: Managing time lags in production processes.

Inventory Costs

Inventories lead to costs associated with purchase, ordering, holding, and financial aspects. These costs are typically grouped under the following headings:

Financial Costs:

1. Operating Capital: Capital required to finance inventories.
2. Opportunity Costs: Capital that could be used in alternative ways.
3. Capital Cost: Interest rate paid for financing inventories.
4. Debt Financing: Borrowings taken to finance inventories.
5. Cash Flow: Cash flow resulting from inventory movements.

Ordering Costs:

1. External and Internal Costs:** Communication with suppliers, internal process costs.
2. Setup: Initiating the ordering process.
3. Paperwork Management: Managing order documents.
4. Transportation and Delivery: Costs of moving and delivering products.
5. Transportation / Material Acquisition: Cost of acquiring and transporting materials.

Holding Costs:

1. Storage / Warehousing: Costs of storing and warehousing inventories.
2. Insurance, Overheads, Management: Measures taken to secure inventories.
3. Risk of Obsolescence: Risk of inventories becoming outdated or going out of fashion.
4. Deterioration / Decay: Inventory degradation or decay over
5. Handling / Storage Damage: Risk of damaging or causing storage-related damage to inventories.
6. Labour and Movements Costs: Labor costs for inventory movements and management.

Operational Costs:

1. Complexity: Complexity of inventory management processes.
2. Managerial Control: Managerial control and supervision costs.
3. Lead Times: Time elapsed in the supply processes.
4. Responsiveness: Costs associated with responding quickly and flexibly to customer demands.

Performance Measurement and Metrics

Performance measurement is used to assess and improve the effectiveness of a business. Key measurements include:

What Are Metrics?

1. Key Performance Indicators (KPIs): Significant measurements indicating how well a business is reaching specific goals.
2. Numerical Measurements: Numerical values expressing business performance for a specific period.
3. Time-Series Data: Metrics recorded over time about the business.

These metrics are used to evaluate not only the overall performance of the business but also the performance of specific departments, teams, or individuals. Well-chosen metrics assist in identifying trends and changes, enabling effective management decision-making.

Perspective on Business Performance

Important financial metrics for business owners and investors include:

1. High Profits: Indicates the profitability of the business.
2. Good Return on Investment (ROI): Measures the profitability of investments.
3. Healthy Cash Flow: Indicates the health of the business’s cash flow.

Supply Chain Performance

There are specific measures and metrics that impact the overall performance of the business. These are typically categorized into the following:

Business Impact

1. Profit: Increasing sales and reducing costs.
2. Return on Investment (ROI): Minimizing stocks and investments while sustaining profits.
3. Cash Flow: Reducing cash flow duration, lead times, and improving payments.

Effect

1. Revenue: Income derived from sales.
2. Time: Time spent in the supply processes.
3. Cost: Business costs.
4. Quality: Product or service quality.
5. Customer: Customer satisfaction and relationships.

Inventory Turnover Rate

Inventory turnover rate is a measure indicating how quickly a business sells its inventory within a year. It is calculated to determine if a business’s inventory is excessive based on sales levels.

Logistics

Supply chain management is a critical component that organizes and optimizes processes from production to delivery. In this article, I will cover fundamental concepts related to international logistics and important documents, explaining key elements of effective supply chain management.

Role of Logistics in the Supply Chain

Supply chains are complex networks that involve processes from the production of products to their shipment, storage, and delivery. These networks, crucial for businesses, influence sales and profitability. However, without effectively and systematically managing these processes, it is impossible to gain a competitive advantage.

Key Abbreviations Used in Logistics

There are important abbreviations within the discipline of logistics. Understanding these abbreviations helps us better comprehend logistics processes. Here are some basic abbreviations:

• EXW (EX WORKS): The seller/factory prepares products at the warehouse and factory. The buyer collects these products and handles all remaining logistics stages.
• FCA (FREE CARRIER): The seller delivers to the carrier at the specified place of delivery in the seller’s country.
• FOB (FREE ONBOARD): Involves the supplier’s responsibility for the material until it is carried onto the deck of the ship.
• CIF (COST, INSURANCE AND FREIGHT): Costs of goods, insurance, and freight are borne by the seller.

These abbreviations are used to specify transportation and payment terms in international trade.

Key Documents and Documentation

Knowing the fundamental documents used in international logistics is important for managing processes properly:

1. Commercial Invoice: A financial document detailing the sale particulars of the shipped product. Important for customs and import taxes.
2. Packing List: Contains details about the packaging of shipped products. Used in transportation and storage stages.
3. Bill of Lading: A legal document proving the transportation contract and confirming that the goods were loaded correctly.
4. Certificate of Origin: A formal document indicating where the products were manufactured. Used to determine customs duties.
5. Certificate of Conformity: A document certifying that the products comply with specific standards.
6. Material Safety Data Sheet: Contains safety information about the transported material.

These documents play a crucial role in managing logistics processes accurately and systematically.

Load Types

Knowing different loading types is a significant factor affecting transportation costs:

• FCL (Full Container Load): Encompasses the entire container. Payment is made for the entire container, and the load belongs to you.
• LCL (Less Than Container Load): Represents shared container use. Your loads are loaded onto a shared container.
• FTL (Full Truck Load): Covers all the load in a truck. Payment is made for the entire truck, and the load belongs to you.
• LTL (Less Than Truck Load): Your loads are loaded onto a shared truck.

These loading types are factors that affect transportation costs and play a crucial role in organizing logistics processes.

Logistics Service Providers

Different service providers exist for managing logistics processes:

1. 1PL (First-Party Logistics): Transporting your loads with your vehicles.
2. 2PL (Second-Party Logistics): Hiring another company for logistics operations.
3. 3PL (Third-Party Logistics): Indirectly providing services to companies in need of logistics services.
4. 4PL (Fourth-Party Logistics): A service provider that comprehensively manages the entire logistics process.