Logistics Fundamentals: Value, Service, and Total Cost
What logistics is - and is not
Logistics is the part of supply chain management that plans, implements, and controls the efficient forward and reverse flow and storage of goods, services, and related information between origin and consumption to meet customer requirements. Supply chain management is broader: it adds purchasing, manufacturing, marketing, and the management of inter-organizational relationships. Expect questions that ask you to classify an activity.
The 7 Rs and customer service
Right product, quantity, condition, place, time, customer, cost. Customer service must be segmented - not every customer or SKU earns the same service. The trap is treating service as "as high as possible"; the exam wants service level balanced against total cost, comparing marginal revenue of added service to marginal cost.
Total cost tradeoffs
No cost element is optimized alone. Faster transport cuts inventory and improves service but raises freight; more warehouses shorten outbound distance but add carrying and facility cost. Inventory carrying cost is commonly estimated at 20–30% of inventory value per year, covering capital, storage, obsolescence, damage, and insurance.
Worked example
Option A: truck, $1,800, 2 days. Option B: rail, $1,100, 10 days. Shipment value $100,000, carrying cost 25%/year. Extra 8 days transit costs $100,000 × 0.25 × 8/365 ≈ $548. Totals: A = $1,800; B = $1,648 - before adding the larger safety stock and lower reliability rail demands, which usually flips the decision back to truck.
The cheapest freight rate is almost always the wrong answer.