Concepts of Logistics

Let’s learn about Concepts of Logistics. Logistics management is the part of supply chain management that plans, implements, and controls the efficient, effective forward, and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer’s requirements.

The appreciation of the scope and importance of logistics and the supply chain has led to a more scientific approach being adopted towards the subject. This approach has been aimed at the overall concept of the logistics function as a whole and also at the individual sub-systems. Much of this approach has addressed the need for, and means of, planning logistics and the supply chain, but has also considered some of the major operational issues.

Logistics refers to the management of the flow of goods and services between the point of origin and the point of consumption in order to meet the requirements of customers. Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and occasionally security. Logistics is a channel of the supply chain which adds the value of time and place utility. Today the complexity of production logistics can be modeled, analyzed, visualized and optimized by plant simulation software.

Primary logistics activities and decisions

• Helps the marketing department to set customer service levels
• Facilitates taking location decisions
• Helps in performing transportation activities (Example – transportation mode selection, vehicle scheduling, carrier routing, facilitates in maintaining inventory (inventory short-term forecasting, planning and control, cooperate with production to calculate EOQ, sequence and time production)
• Facilitates in collection of information, maintaining flows and order processing
• Helps in warehousing and materials handling
• Helps in performing packaging activities

Logistics management is the planning, implementation and control of the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer requirements.

Parallel to the growth in the importance of distribution, logistics and the supply chain has been the growth in the number of associated names and different definitions that are used. Some of the different names that have been applied to distribution and logistics include

• physical distribution;
• logistics;
• business logistics;
• materials management;
• procurement and supply;
• product flow;
• marketing logistics;
• supply chain management;
• demand chain management;
• and there are several more.

These many terms are used, often interchangeably, in literature and in the business world. One quite widely accepted definition that uses some of these terms also helps to describe one of the key relationships. This is as follows

Logistics = Materials management + Distribution

Major emphasis is now placed on the importance of information as well as physical flows and storage, and an additional and very relevant factor is that of reverse logistics – the flow of used products and returnable packaging back through the system.

It is interesting to detect the different biases – military, economic, academic, etc. An appropriate modern definition that applies to most industry might be that logistics concerns the efficient transfer of goods from the source of supply through the place of manufacture to the point of consumption in a cost-effective way whilst providing an acceptable service to the customer.

Physical Distribution

Logistics has the objective of delivering exactly what the customer wants at the right time, in the right place, and at the right price. In planning for the delivery of goods to customers, marketers have usually looked at a process termed physical distribution, which refers to the activities used to move finished goods from manufacturers to final customers. Physical distribution activities include order processing, warehousing, materials handling, transportation, and inventory control. This process impacts how marketers physically get products where they need to be, when they need to be there, and at the lowest possible cost.

In logistics, the focus is on the customer. When planning for the logistics function, firms consider the needs of the customer first. The customer’s goals become the logistics provider’s goals. With most logistics decisions, firms must compromise between low costs and high customer service.

Components of Logistics Management

• Input into logistics: Natural Resources (Land, Facilities and Equipment), Human Resources, Financial Resources, Information Resources
• Management Actions: Planning, Implementation, control
• Suppliers: Raw material inventory, in process inventory, finished goods
• Output of logistics: Marketing Orientation (Competitive advantage), efficient movement to customer, proprietary asset, time-place utility

Evolution of Logistics

The elements of logistics and the supply chain have, of course, always been fundamental to the manufacturing, storage and movement of goods and products. It is only relatively recently, however, that they have come to be recognized as vital functions within the business and economic environment. The role of logistics has changed in that it now plays a major part in the success of many different operations and organizations. In essence, the underlying concepts and rationale for logistics are not new. They have evolved through several stages of development, but still use the basic ideas such as trade-off analysis, value chains and systems theory together with their associated techniques.

There have been several distinct stages in the development of distribution and logistics.

1950s and early 1970s – In this period, distribution systems were unplanned and unformulated. Manufacturers manufactured, retailers retailed, and in some way or other the goods reached the shops. Distribution was broadly represented by the haulage industry and manufacturers’ own-account fleets. There was little positive control and no real liaison between the various distribution-related functions.

1960s and early 1970s – In the 1960s and 1970s the concept of physical distribution was developed with the gradual realization that the ‘dark continent’ was indeed a valid area for managerial involvement. This consisted of the recognition that there was a series of interrelated physical activities such as transport, storage, materials handling and packaging that could be linked together and managed more effectively. There was recognition of a relationship between the various functions, which enabled a systems approach and total cost perspective to be used. Under the auspices of a physical distribution manager, a number of distribution trade-offs could be planned and managed to provide both improved service and reduced cost. Initially the benefits were recognized by manufacturers who developed distribution operations to reflect the flow of their product through the supply chain.

1970s – This was an important decade in the development of the distribution concept. One major change was the recognition by some companies of the need to include distribution in the functional management structure of an organization. The decade also saw a change in the structure and control of the distribution chain. There was a decline in the power of the manufacturers and suppliers, and a marked increase in that of the major retailers. The larger retail chains developed their own distribution structures, based initially on the concept of regional or local distribution depots to supply their stores.

1980s – Fairly rapid cost increases and the clearer definition of the true costs of distribution contributed to a significant increase in professionalism within distribution. With this professionalism came a move towards longer-term planning and attempts to identify and pursue cost-saving measures. These measures included centralized distribution, severe reductions in stock-holding and the use of the computer to provide improved information and control. The growth of the third-party distribution service industry was also of major significance, with these companies spearheading developments in information and equipment technology. The concept of and need for integrated logistics systems were recognized by forward-looking companies that participated in distribution activities.

Late 1980s and early 1990s – In the late 1980s and early 1990s, and linked very much to advances in information technology, organizations began to broaden their perspectives in terms of the functions that could be integrated. In short, this covered the combining of materials management (the inbound side) with physical distribution (the outbound side). The term ‘logistics’ was used to describe this concept. Once again this led to additional opportunities to improve customer service and reduce the associated costs. One major emphasis made during this period was that informational aspects were as important as physical aspects in securing an effective logistics strategy.

1990s – In the 1990s the process was developed even further to encompass not only the key functions within an organization’s own boundaries but also those functions outside that also contribute to the provision of a product to a final customer. This is known as supply chain management. The supply chain concept gave credence to the fact that there may be several different organizations involved in getting a product to the marketplace. Thus, for example, manufacturers and retailers should act together in partnership to help create a logistics pipeline that enables an efficient and effective flow of the right products through to the final customer. These partnerships or alliances should also include other intermediaries within the supply chain, such as third-party contractors.

2000 to 2010 and beyond – Business organizations faced many challenges as they endeavored to maintain or improve their position against their competitors, bring new products to market and increase the profit-ability of their operations. This led to the development of many new ideas for improvement, specifically recognized in the redefinition of business goals and the re-engineering of entire systems.

Objectives of Logistics

The objectives of Logistics are summarized as under.

• Rapid response: Rapid response is concerned with a firm’s ability to satisfy customer’s requirement in a timely manner. Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response.
• Minimum variance: Variance is any unexpected event that disrupts system. Logistical operations are disrupted by events like delays in order receipt, disruption in manufacturing, goods damaged at customer’s location and delivery to an in correct location etc.
• Minimum inventory: This is a component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio.
• Movement consolidation: Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc.
• Quality: If the quality of product fails logistics will have to ship the product out of customers’ premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction.
• Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the management world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually.
• Life cycle support: Life cycle support is also called cradle-to-cradle logistical support. It means going beyond reverse logistics and recycling to include the possibility of after sales services, product recalls and product disposal. This means that firms must consider how to make a product and its package (cradle) and then how to remake and reuse them (to cradle).

From Manufacturer’s Point of View

Manufacturers are a major player in business operations as they bear the maximum risk in the whole chain. Consequently the key objectives in logistics management from the manufacturers perspective is considered as primary and these are as follows.

• Reduction in transportation cost for in-bound raw materials and components
• Reduction in inventory leading to lower operational costs
• Optimising the route for transporting the products to the customers
• Efficient and faster transportation system
• Minimised waiting time for inventory at plants and warehouses
• Reduction in material handling costs
• Smooth flow of materials through production systems

From Logistician’s Point of View

Logisticians are the intermediaries who carry out various activities between the manufacturer, seller and the buyer for reaching the materials to their destination. A list of such logisticians is as follows.

• Clearing and forwarding agents.
• Customs house agents
• Shipping agents
• Freight brokers
• Freight forwarders
• Stevedores

The key objectives in logistics management from the logisticians’ perspective are

• Improved scheduling
• Lower transportation cost
• Improved services to customers
• Improved efficiency in transportation

From Customer’s Point of View

The Customer is the focal point of the entire logistics system. The key objectives in logistics management from the Customer’s perspective are summarised as under.

• Timely delivery
• Optimum inventory
• Lower distribution cost

In short the Customers fundamentally expect a reliable service of a high degree and minimum cost of transportation which would help them in structuring a competitive pricing in the market.