Management of Logistics
Management of Logistics
Logistics facilitates in getting products and services to the customers when they are needed and desired by them. It also helps in economic transactions, serving as a major enabler of growth of trade and commerce in an economy. Logistics has come to be recognized as a distinct function with the rise of mass production systems. Production and distribution is viewed as a sequential chain of extremely specialized activities. The role of logistics is to ensure availability of all the required materials before every step in this chain. Obviously inventory of raw materials, semi-finished and finished goods is necessary across this chain to ensure its smooth functioning.
The term logistics is used to describe the entire process of materials and products moving into, through and/or out of the organization. Logistics thus includes any activity involved in the management of inventory at rest (awaiting production into finished goods or distribution at the final point of sale) or in motion (during transportation). Logistics management (LM) is the management of the logistics activities. Competitive advantage is a key output of the LM process.
The scope and influence of logistics has evolved in the late 1940s. In the 1950s, and 1960s, military was the only organization which used logistics. Later, the scope of logistics has been extended beyond the army, as it has been recognized as one of the important tools for developing competitiveness. Competitive advantage means the organization has the ability to differentiate itself, in the customer’s eyes, and also is operating at a lower cost and greater profit.
Logistics in the business world have developed fast in the last twenty to twenty five years. The logistics managers have a much wider and more complex responsibilities in present environment. The logistics is a wide subject which includes several functions namely (i) information system, (ii) customer (marketing) , (iii) raw material acquirement, (iv) transportation such as air, rail, road, and sea, (v) warehousing, and (vi) packaging etc.
LM plays a significant role in the success of the organizational operations and has a direct impact on its bottom line. It also plays a big part in customer satisfaction. It is that part of supply chain management (SCM) which plans, implements, and controls the efficient, effective forward and reverse flows and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements. Competitive advantage can thus be gained by the organization, if it finds ways of performing the activities involved in the logistics in more effective and efficient manner than its competitors.
In the present environment, organizations are becoming more aware of, and interested in the LM. The recognition of the role and importance of logistics and the management thereof in an organization is not a recent trend but has been receiving growing attention, particularly since 1980s. Several factors have contributed to the growing focus on the LM. The factors underlying the recognition of the importance of the LM include (i) advances in technological and quantitative techniques, (ii) significant opportunities presented by e-commerce potential, (iii) development of the systems approach and total cost analysis concept. (iv) recognition of the role of logistics in the organizational customer service programme, (v) erosion of the profits because of their failure to examine functional areas where cost savings can be realized, (vi) profit leverage resulting from increased logistics efficiency, (vii) general economic conditions, (viii) recognition of the role of logistics in creating competitive advantage in the market-place, particularly in the face of domestic and foreign competition, saturated markets, and government regulation, (ix) consolidation of organizations thus increasing the importance of sound logistics practices and continued strategic planning as organizations are reorganized and product lines are combined, (x) markets, and logistics policies and practices of suppliers of consumer products, being driven by the large retailers. (xi) distributors’ stocking less with respect to organizational products, and depending more on their suppliers’ stocks than in the past, (xii) customer requirements for value-added services continuing to drive costs upwards. (xiii) increasing interest in third-party providers which handle all or part of a organization’s logistics function, particularly with increased penetration into major trade areas, (xiv) inventories continuing to be at high levels irrespective of improved forecasting, inventory and make-to-order software available, (xv) gaps in logistics support left by enterprise resource planning (ERP) systems, resulting in the need for additional bolt-on systems in the near future, (xvi) customer service activities continuing to be centralized and consolidated, and (xvii) increased focus on computer technology and distribution software.
The major objectives of LM are (i) reduction of inventory, (ii) economy of freight, (iii) reliability and consistency in delivery performance, (iv) minimum damage to the product, and (v) quicker and faster response. Normally an organization is to carry necessary inventory for satisfying the customer needs. Efficient LM helps organization in reducing this inventory at low levels, and still fulfills the needs of the customers. Freight constitutes substantial cost. This can be suitable controlled with an effective LM system in the organization. Reliability and consistency in delivery performance contributes a lot towards customer satisfaction. Reliability and consistency in delivery performance can be substantially improved with systematic LM. Damage to materials generally takes place during the transportation, frequent handling, and warehousing. This damage can be considerably controlled with an efficient and effective LM practice. Further, LM enhances the organizational capabilities to have quicker and faster response towards issues concerning customers. The important functions of LM include (i) order processing, (ii) inventory planning and management, (iii) warehousing, (iv) transportation, and (v) packaging.
There is no single accepted definition for logistics. There are different aspects which have been emphasized within the several definitions of the concept. These aspects relate to both the economic practice and the area of knowledge. The different definitions of logistics are given below.
The European Logistics Association has adopted the definition that ‘Logistics is a concept involving the organization, planning, control and execution of the flow of goods form their places of manufacturing (purchase), through the sphere of production and distribution, to the final consumer, which aims to satisfy the demands of the market with minimal commitment and capital’.
The American Council of Logistics Management defines logistics as ‘the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customers’ requirements’.
Ch. Pohl defines logistics as ‘logistics comprises all the steps leading to planning, supervision, execution and control of the time-and-space transformation of goods and the related transformation in quantity and range of assortment, the manipulation properties and the degree of logistics determination of goods. A coordinated execution of these activities enables the flow of goods that connects the origin point with the consumption point in a possibly most efficient manner’.
Philip Kotler defines logistics as ‘planning, implementing, and controlling the physical flows of materials and finished goods from point of origin to point of use to meet the customer’s need at a profit’.
The Council of Logistics Management defines logistics as ‘Logistics is part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’ requirements’.
There is no clear consensus on the definition of the LM. Some people refer to LM as SCM, i.e. they considered that LM is logistics taken across inter-organizational boundaries and they use these terms interchangeably. Hence, LM is often confused with SCM.
Simchi-Levi, Kaminski and Simchi-Levi gave the definition of SCM as ‘Supply Chain Management is a set of approaches utilized to efficiently integrated suppliers, manufactures, 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 system wide costs while satisfying service level requirements’.
Johnson et al. also presented the definitions of LM, materials management, and SCM. They maintained that ‘logistics define the entire process of materials and products moving into, through, and out of an organization. Inbound logistics covers the movement of materials received by the suppliers. Material management describes the movements of materials and components within the organization. Physical distribution refers to the movement of goods outwards from the end of the assembly line to the customer. Finally, SCM is a somewhat larger concept than logistics, because it deals with managing both the flow of materials and the relationships among channel intermediaries from the point of origin of raw materials through to the final consumer’.
Recently, however, there has been some convergence towards accepting SCM as a larger concept than LM. SCM has broader objectives and actually encompasses LM. The differences between the two concepts are now accepted. The SCM covers more functions than just logistics. However, logistics remains one of the key components of SCM. SCM also includes ‘customer relationship management’ (CRM) and ‘product development, and commercialization. It includes inter-organizational, multi-functional processes which target everything from the supplier’s inbound freight to the end consumer. LM is the more practical, hands-on part of the supply chain where goods are transported into a facility, properly stored, handled and transported out. It focuses on short-term procedures where as SCM is focused on the long-term.
The Council of Supply Chain Management defines LM as ‘….. that 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 customers’ requirements’.
Analyzing the content of the different definitions, It can be concluded that (i) logistics is a process of physical flow of goods/services and accompanying information, (ii) logistics is a concept of integrated management of goods/services and information flow, and (iii) logistics is an interdisciplinary field (apart from its own heritage, it also makes use of technical, military, mathematic, and economic sciences, including management) where the goods/information flow takes place throughout the supply chain.
Logistics is now universally considered as a sub-set of SCM. In SCM the five key functions are (i) procure, (ii) make, (iii) move, (iv) store, and (v) service. Logistics is considered as the movement of products from one point to another point and all the activities involved making this happen (from carrier selection to planning to execution). Logistics is involved at various stages of a supply chain namely (i) from supplier to the production plant, (ii) from the plant to the distribution centres, (iii) from distribution centres to the stock houses, (iv) from stock houses to customers, or (v) any of these combinations. Logistics is the process of movement of materials and products into, through and out of the organization.
An effective LM system existing in the organization delivers value to the customer through three main phases consisting of (i) inbound logistics, (ii) process logistics, and (iii) outbound logistics. The inbound logistics are the operations, which precede production. These include the movement of raw materials, and components for processing from suppliers. Process logistics are the operations, which are directly related to processing. These include activities like storage and movement of raw materials, components within the production places. Outbound logistics are the operations, which follow the production process. These include activities like warehousing, transportation, and inventory management of finished goods.
The concept of logistics has its base upon the systems approach. There is a single chain, with flow of materials starting from the supplier, then to the plant and finally to the end customer, and also these activities are done sequentially in order to achieve customer satisfaction at low cost. For this to be successful there has to be co-ordination in the activities of the different departments.
The key to success in LM needs heavy emphasis on integration of activities, cooperation, coordination and information sharing throughout the entire supply chain especially from suppliers to the customers. To be able to respond to the challenge of integration, most organizations need sophisticated decision support systems (DSS) based on powerful mathematical models and solution techniques, together with advances in information and communication technologies. There is no doubt that quantitative models and computer based tools for decision making have a major role to play in today’s environment. This is especially true in the rapidly growing area of LM. These computer-based LM systems can make a significant impact on the decision process in the organization.
The essence of logistics is the flow of material goods and services from their place of origin to the final customer (consumer). The aim is to ensure the adequacy of place (moving goods to places where there is a demand for them) and time (maintaining the right stocks levels and proper distribution of goods / services. An efficient and effective implementation of logistics objectives is possible because of the activities such as (i) movement and transport, (ii) warehousing and storage, (iii) packaging, (iv) manipulation of materials, (v) stocks control, (vi) fixing orders, (vii) demand forecasting, (viii) production planning, (ix) purchase, (xi) customer service at an appropriate professional level, (xii) warehouses and plants location, (xiii) provision of spare parts and after-sales service, and (xiv) collection and disposal of waste.
The key issues normally considered in LM are (i) logistics integration, (ii) facility location and network design, (iii) transportation and vehicle routing, (iv) material handling and order picking, (v) customer service, (vi) product design, (vii) logistics of production and operations, (viii) warehouse management and distribution strategies, (ix) inventory management, (x) information systems and DSS, (xi) e-commerce and e-logistics, and (xii) reverse and green logistics. These areas interact to a large degree with other functions of the organization, and with other elements of the supply chain. They can hence benefit a great deal from efficient management based on information and optimization systems.
Outputs of the LM process are (i) competitive advantage for the organization resulting from a marketing orientation and operational efficiencies and effectiveness, (ii) time and place for the storage of materials, (iii) efficient movement to customer, and (iv) proprietary asset of the organization. Inputs to the LM process, with respect to services or products (raw materials, in-process inventory, and finished goods), acquired from various suppliers, include (i) natural resources (land, facilities and equipment), (ii) human resources, (iii) financial resources, and (iv) information resources.
The concept of integrated LM is the key to the success of a particular supply chain, where integrated LM is the administration of the various logistics activities as an integrated system, moving inventory through a constant and consecutive chain/network of value-added steps, with it arriving when needed in the proper quantity and form, at the customer. The basis of the integrated LM concept is total cost analysis which is minimizing the total cost of transportation, warehousing, inventory, order processing and information systems, and lot quantity cost, while achieving a desired customer service level, i.e. at a given level of customer service, management is to minimize total logistics costs rather than attempting to minimize the cost of individual activities.
Role of information flow on the LM activities
The bond connecting the physical flow of goods with these activities is information. It is the information flow which accompanies the flow of material goods and services in the production system. The information flow plays a key role in organizing and functioning of supply chains, linking all the basic elements of the LM system. The integration of information flow makes the system open, efficient, and able to overcome obstacles arising during the flow processes. Thus, this activity of the organization is to be adapted to the requirements and changes of the environment.
Modern logistics, which has a mission to meet the organizational targets, uses the information resources of the organization and creates a database specifically for its needs. A database for the needs of logistics consists of the elements namely (i) the data source (logistics processes, logistics subsystems of the organization, its closer and more distant surrounding along the supply chain), (ii) the users (the entire supply chain), and (iii) the relationships with the represented reality (tools for processing, update, making additions, searching and correction of data; tools for presenting obtained information, in the form of an inquiry or report; indicators and measures).
The information flow which accompanies the flow of material goods and services plays an important role in organizing and functioning of supply chains, linking all basic elements of the LM system. The integration of information flow makes the system open, efficient, and able to overcome obstacles arising during the flow processes. Thus, the activities of the organization are to adapt to the requirements and changes of the environment. The environment of logistics consists of dynamically developing local markets, both in the areas, with increasing risk and competitiveness. The pressure of the latter leads to continuous growth of efficiency of the logistics processes, which in practice means quality improvement and bigger effectiveness of the decision-making processes.
The above can take place when the decision-maker has information on the shaping of particular parameters that characterize the organizational activity and surrounding. Hence, no decision arises ‘suddenly’, but is a transformation of one kind of (basic) information into another – that is, the decision.The process of transforming basic information can be carried out in different ways, depending on the complexity of the phenomena which require making particular decision, as well as the choice of methods and techniques for this transformation. Always, however, the process of transforming information is the integral part of decision-making.
In a knowledge-based economy, information systems provide access to information in real time, facilitate the organization of information collecting and processing, and (i) ensure the exchange of information with customers in digital form, (ii) help reduce communication costs, (iii) allow the managers-logisticians to share databases and place orders by means of electronic forms, and (iv) facilitate management of dispersed kind of e-logistics.
There are many areas of the LM system where the management of the information makes the operations efficient and effective. These include the following.
- Simulation and optimization of information flow in the supply chain allows for stocks reductions and prevents a situation when stocks are running out.
- Helps in the price fixation policies which allow specifying the price level which can bring maximum income or profit.
- Allows the multi-dimensional segregation of customers which means the identification of groups of customers with similar features and behaving the same way, buying similar products etc. This results in better understanding of the customers. All this has impact on planning efficiency and the effectiveness of marketing, by customization and personalization of interactions.
- Helps in the customer loyalty analysis. Modeling of those factors which can cause the loss of customers and defining customer groups and which can potentially switch to competition is needed. This allows taking effective steps to keep regular customers for given products. The analysis also helps to develop loyalty programs, in order to stabilize the portfolio of customers.
- Facilitates the analysis of customer value in terms of cooperation profitability, detection of the most profitable customer groups, as well as recognizing the non-profitable and loss-making ones. These measures make it possible to effectively plan cooperation with customers and increase profitability.
- Allows the analysis of customer satisfaction which means assessing the level of customer satisfaction and its changes as products and services develop. Such measure helps to plan activities aimed at raising the customers’ satisfaction with the goods provided.
- Helps in the control of logistics costs. A continuous analysis of financial results, assisted by integrated IT software, allows to effectively managing the costs within the organization.
- Allows the management of human resources since the accumulated knowledge facilitates the choice of employees for specific tasks or work, with a particular pay level.
- Improves the quality of products and services because of the monitoring and early detection of quality problems and their minimization which ensures customer satisfaction.
Modern LM does not only need data, information, but also knowledge which is an intangible asset of the organization, connected with human activity which, when applied, can be the source of competitive advantage. This knowledge, if properly used in the organization, can not only bring about success, but also provide conditions for its further extension and sharing.
LM design and material distribution
LM constitutes the distribution service which is the essence of customer service. If the role of customer service is to provide the material needed by him in time, then this value is created through the transportation of goods, or precisely when the transportation ends at the customer. This means that the logistics function contains several value added activities. A good logistics service quality consists of the moment when value is created for the logistics customer. The creation of value means that the customer has perceived that the supplier has met the expectations and achieved quality. The customer perception acts as a filter to the output of logistics services. In many cases, the provided logistics service is affected by the perceptions of the service provider, for example a logistics manager delivers those services in agreement with what they think the customer wants. On the other hand if the logistics service provider’s perceptions differ from the customer’s perceptions, then a quality gap is created.
In order to measure the logistics customer service, there are several indicators which are widely used in several organizations. The most common indicators are (i) order cycle time which means the elapsed time from customer order to delivery, (ii) stock availability which is the percentage of demand for a given line item that can be met from available inventory, (iii) frequency of delivery which means number of deliveries within a specific time-window, (iv) delivery reliability which means the proportion of total orders is delivered on time and this indicator is not just reflecting the delivery performance but also the stock availability and order processing performance, and (v) order completeness which shows the proportion of orders which the organization has delivered and completed meaning that there is no backorders or part shipments.
The LM in the area of long distance places can be difficult because of the change of culture as well as the characteristics of the market. Normally, the logistics offerings are subject to culturally influenced preferences, which can be widespread over long distances. The logistics service is more likely to be different for different market segments, since service expectations differ when the culture of the place changes. The market place is the most effective starting point for the LM design, meaning that the organization is to understand the service needs of the various markets which it addresses and then seek to develop low cost logistics solutions.
After understanding the requirements from the market, the logistics service level can be identified. It is known that logistics service quality is a wide concept. No organization can apply all elements in the concept and hence the level of the logistics service quality is to differ from one case to another. Fig 1 gives a typical model of logistic management showing various activities for designing the logistics strategies, which are customer focused.
Fig 1 Typical model of logistics management in and organization
When the organization is carrying out marketing over very long distances then a customer service based approach usually takes a back seat and the prime focus of the LM design becomes the minimization of the cost. Normally LM design is driven by customer service parameters, with five basics steps as given below.
Defining the problem – Defining the decision problem by, for example, stating the objectives, and determining the scope of the problem in terms of ware housing and alternative transportation modes and routes.
Determining the strategic importance of the customers – This involves analyzing the strategic importance of the customers affected by the logistics network design process. As the design of the network is based on the service preferences of the customers, the strategic importance of the customers is an important input to the design process.
Analyzing the customers’ preferences for customer service – It is to be noted that the customers normally evaluate separately the importance of the different service elements from their point of view.
Evaluating the alternative nodes and links in the logistics network – The network includes the transportation routes, warehouse operators and haulers. The evaluation is based on the preferences defined in the previous phase for the different customer service elements. The preferences are weighted by the strategic importance of the customers in the combination process to take into account the differences in the strategic importance of the customers.
Optimization – The final phase in the proposed approach involves optimizing the logistics network based on the priorities defined in the previous phase. As the priority that is defined for each alternative link and node represents the evaluated capability of fulfilling the customer service requirements, the objective function for the optimization is to maximize the overall priority of the logistics network, subject to relevant constraints and restrictions.
Distribution networks in decentralized and centralized logistics models
Organizations generally follow two types of distribution network. These are (i) decentralized logistic model, and (ii) centralized logistic model. These models are shown in Fig 2.
Fig 2 Distribution structures in decentralized and centralized logistics model
In the decentralized logistics model, the organization transfers the produced materials in bulk to the warehouses constructed at the regional level and the branch level and the local customers are serviced from these warehouses. In case of the centralized logistics model the customers are directly served from the plant where the materials are bring produced. Both the decentralized and centralized logistics models have their advantages and disadvantages. The relationship level and stock level within decentralized and centralized distribution structures is shown in Fig 3.
Fig 3 Relationship between stock level and service level within decentralized and centralized distribution structures
However, most of the organizations follow a mixed practice. The organization serves the local customers near the production plant and those customers who have large requirements directly from the production plant and serve the customers in the areas of the regions and branches from the warehouses located in those areas. In the decentralized logistics model, the communication with the customers also takes place in decentralized way i.e. through regions and branches.