Now that’s a tall order! Although logistics has been performed around the globe since ancient civilizations were at war with one another, we’re still learning and trying to become experts at managing it. Despite the research and progress that’s been made, logistics is still one of the most dynamic and challenging operational areas of supply chain management. To understand what is logistics at the most basic level, we must know that logistics management includes the various related tasks required to get the right goods to the right customers at the right time. Others tout a broader definition: getting the right product in the right quantity and right condition at the right place at the right time for the right customer at the right price.
No other function in the supply chain is required to operate 24 hours a day, seven days a week from New Year’s Day to New Year’s Eve—there are no days off. That is why customers often take logistics for granted; they have come to expect that product delivery will be performed as promised. But it’s not that simple, as you will learn. It can be expensive and takes expertise.
Logistics management adds value to the supply chain process if inventory is strategically positioned to achieve sales. But the cost of creating this value is high. According to the 19th annual “State of Logistics Report” by the Council of Supply Chain Management Professionals published in 2008, United States companies spent US$1,398 billion performing logistical services in 2007. Transportation costs for the same year ran US$857 billion, and that constituted nearly 62 percent of total logistics costs.
As these statistics indicate, the largest contributor to logistics cost is transportation: the movement of raw materials to a processing plant, parts to a manufacturer, and finished goods to wholesalers, retailers, and customers. But getting the goods from one point to another requires performing a number of other functions related to shipment. Goods need to be packaged, loaded, unloaded, warehoused, distributed, and paid for whenever they change hands.
Supply chain partners must efficiently and effectively carry out these logistical tasks to achieve competitive advantage. In an increasingly global market, this may require mastery of languages, currencies, divergent regulations, and various business climates and customs.
Defining logistics precisely presents a challenge. Everyone agrees that logistics management is (or should be) a part of supply chain management. As Douglas Long writes, “Supply chain management is logistics taken to a higher level of sophistication.” The exact line of demarcation between the two management systems is understandably a bit vague.
In their classic text Supply Chain Logistics Management, authors Bowersox, Closs, and Cooper include several functions that are treated outside the logistics section of this course, such as forecasting and inventory management. Some authorities may place those two functions within the scope of logistics management, while others may not, but all agree that inventory and forecasting must be considered when designing and managing an effective, efficient system for moving goods quickly from place to place.
What is Logistics in Supply Chain Management?
The supply chain is about “moving” – or “transforming” – raw materials and ideas into products or services and getting them to customers. Well the question is, what is logistics management? in supply chain. Logistics is about moving materials or goods from one place to another. Logistics is, in that sense, the servant of design, production, and marketing. But it is a servant that can bring added value by quickly and effectively doing its job. The following areas of logistics management contribute to an integrated approach to logistics within supply chain management.
Figure above combines several perspectives to illustrate what is logistics?, in a broader scope:
Note: The lecture covering what is logistics management? is a part of logistics training, supply chain management certification, and diploma in supply chain management. All these programs are offered 100% online by AIMS’ institute of supply chain management.
Many modes of transportation play a role in the movement of goods through supply chains: air, rail, road, water, pipeline. Selecting the most efficient combination of these modes can measurably improve the value created for customers by cutting delivery costs, improving the speed of delivery, and reducing damage to products.
When inventory is not on the move between locations, it may have to spend some time in a warehouse. Warehousing is “the activities related to receiving, storing, and shipping materials to and from production or distribution locations. It is a very important factor, we need to consider to know what is logistics.”
Third- and fourth-party logistics:
Like other aspects of supply chain management, the various logistics functions can be outsourced to firms that specialize in some or all of these services. Third-party logistics providers (3PLs) actually perform or manage one or more logistics services. Fourth-party providers (4PLs) are logistics specialists and play the role of general contractor by taking over the entire logistics function for an organization and coordinating the combination of divisions or subcontractors necessary to perform the specific tasks involved. This growing trend incorporates the supply chain management philosophy of concentrating on core competencies and partnering with other firms to perform in areas outside your competence. We’ll learn more about 3PLs and 4PLs later in this section.
What is Logistics in Reverse logistics (or the reverse supply chain):
Another growing area of supply chain management is reverse logistics, or how best to handle the return, reuse, recycling, or disposal of products that make the reverse journey from the customer to the supplier. This business can be handled at a loss, or it can actually become a profit center. We’ll also cover this topic in more detail later in this section.
What is Logistics Value Proposition:
Being able to match key customer expectations and requirements to your firm’s operating competency level and customer commitment is the essential ingredient in optimizing the value of logistics. The logistics value proposition stems from a unique commitment of your firm to an individual customer or select group of customers. The value stems from your ability to know exactly how to balance logistics costs against the appropriate level of customer service for each of your key customers.
So you’ll need to determine the exact recipe and proportion of ingredients in order to meet a particular customer’s logistical expectations and requirements. How will you know when you’ve got the right balance? If you keep in mind that logistics must be managed as an integrated effort to achieve customer satisfaction at the lowest total cost, then it makes sense that service and cost minimization are the key elements in this proposition.
What company hasn’t had to pay a painfully high price to ship a product overnight to meet a deadline of some sort? It can be done, but it’s not fiscally prudent. In the same manner, any level of logistical service can be achieved if a company is willing and able to pay for it. So technology isn’t the limiting factor for logistics for most companies—it’s the economics. For instance, what does it cost to keep the service level high if a firm keeps a fleet of trucks in a constant state of delivery readiness or it keeps dedicated inventory for a high volume customer that can be delivered within minutes of receiving an order. How do you decide if that’s money well spent?
The key is to determine how to outperform competitors in a cost-effective manner. If a table manufacturer needs a specific type of wood to produce all its table legs but that wood type is not available, it may force the plant to stop or close down until the material arrives, thereby incurring expensive delays, potential lost sales, and decreased customer satisfaction. In contrast, if a home improvement store experiences a one-day delay in inventory replenishment of 20-watt night-light bulbs at its warehouse, the impact on profit and operational performance is likely to be very low and insignificant.
In the majority of situations, the cost-benefit impact of a logistical failure is directly related to the importance of the service to the customer. When a logistical failure will have a significant impact on a customer’s business, error-free logistics service should receive higher priority. Such service implies that the customer order was complete, delivered on time, and consistently correct over time.
The second element of the value proposition, cost minimization, should be interpreted as the total cost of logistics in order to be accurate. The total cost of logistics as “the idea that that all logistical decisions that provide equal service levels should favor the option that minimizes the total of all logistical costs and not be used on cost reductions in one area alone, such as lower transportation charges.”
For many decades, the accounting and financial departments in organizations sought the lowest possible cost for each logistical function, with little or no attention paid to integrated total cost trade-offs. As they learned later, that did not work very well. So today’s leading supply chain companies develop functional cost analysis and activity-based costing activities that accurately measure the total cost of logistics. The goal now is for logistics to be cost-effective as determined by a cost-benefit analysis, taking into account how a logistical service failure would impact a customer’s business.
What is Logistics Goals and Strategies:
At the highest level, logistics management shares the goal of supply chain: “to meet customer requirements.” There are a number of logistics goals that most experts agree upon:
- Respond rapidly to changes-in the market or customer orders.
- Minimize variances in logistics service.
- Minimize inventory to reduce costs.
- Consolidate product movement by grouping shipments.
- Maintain high quality and engage in continuous improvement.
- Support the entire product life cycle and the reverse logistics supply chain.
An effective logistics management strategy depends upon the following tactics:
- Coordinating functions (transportation management, warehousing, packaging, etc.) to create maximum value for the customer.
- Integrating the supply chain.
- Substituting information for inventory.
- Reducing supply chain partners to an effective minimum number.
- Pooling risks.
We’ll analyze each of these tactics.
Logistics can be viewed as a system made up of interlocking, interdependent parts. From this perspective, improving any part of the system must be done with full awareness of the, effects on other parts of the system. Before the advent of modern logistics management, however, the various operations contributing to the movement of goods were usually assigned to separate departments or divisions, such as the traffic department. Each area had its own separate management and pursued its own strategies and tactics.
Decisions made in any one functional area, however, are very likely to affect performance in other areas, and an improvement in one area may very well have negative consequences in another unless decisions are coordinated among all logistics areas. Adopting more efficient movement of goods, for example, may require rethinking the number and placement of warehouses. Different packaging will almost certainly affect shipping and storage. You may improve customer service to a level near perfection but incur so many additional expenses in the process that the company as a whole goes broke.
You need a cross-functional approach in logistics, just as you do in supply chain management as a whole. Teams that cross functions are also very likely to cross company boundaries in a world of international supply chains with different firms focused on different functions.
The overall goal of logistics management is not better shipping or more efficient location of warehouses but more value in the supply network as measured by customer satisfaction, return to shareholders, etc. There is no point, for instance, in raising the cost of shipping—thus, the price to the customer—to make deliveries faster than the customer demands. Paying more to have a computer delivered today rather than tomorrow may not be a tradeoff customers want to make. Getting a still-warm pizza delivered in less than 20 minutes, however, might be worth a premium price (and a tip). Fast delivery, in other words, is not an end in itself, and the same is true of any aspect of logistics management or supply chain management.
Integrating the Supply Chain:
Integrating the supply chain requires taking a series of steps when constructing the logistics network. In a dynamic system, steps may be taken out of order and retaken continuously in pursuit of quality improvements; the following list puts the steps in logical order.
LOCATE IN THE RIGHT COUNTRIES:
- Identify all geographic locations in the forward and reverse supply chains.
- Analyze the forward and reverse chains to see if selecting different geographic locations could make the logistics function more efficient and effective. (Not all countries are equal in terms of relevant concerns such as infrastructure, labor, regulations, and taxes).
DEVELOP AN EFFECTIVE IMPORT-EXPORT STRATEGY:
- Determine the volume of freight and number of SKUs (stockkeeping units) that are imports and exports.
- Decide where to place inventory for strategic advantage. This may involve deciding which borders to cross and which to avoid when importing and exporting as well as determining where goods should be stored in relation to customers. (Some shipping companies now add a “war risk surcharge” if they’re required to pass through or near a nation with civil unrest or at war.) Both geographic location and distance from the customer can affect delivery lead times.
SELECT WAREHOUSE LOCATION:
- Determine the optimal number of warehouses.
- Calculate the optimal distance from markets.
- Establish the most effective placement of warehouses around the world.
SELECT TRANSPORTATION MODES AND CARRIERS:
- Determine the mix of transportation modes that will most efficiently connect suppliers, producers, warehouses, distributors, and customers.
- Select specific carriers.
SELECT THE RIGHT NUMBER OF PARTNERS:
- Select the minimum number of firms freight forwarders and 3PLs or a 4PL to manage forward and reverse logistics. In selecting logistics partners, also consider their knowledge of the local markets and regulations.
DEVELOP STATE-OF-THE-ART INFORMATION SYSTEMS:
- Reduce inventory costs by more accurately and rapidly tracking demand information and the location of goods. Developing state-of-the-art information systems may be difficult in some regions. Such situations make defining the processes and information flows even more critical.
Substituting Information for Inventory:
Physical inventory can be replaced by better information in the following ways:
- Improve communications. Talk with suppliers regularly and discuss plans with them.
- Collaborate with suppliers. Use HT to coordinate deliveries from suppliers. Remove obsolete inventory. Use continuous improvement tools and share observations about trends.
- Track inventory precisely. Track the exact location of inventory using bar codes and/or RFID (radio frequency identification) with GPS (global positioning systems).
- Keep inventory in transit. It’s possible to reduce systemwide inventory costs by keeping inventory in transit. One method of keeping inventory in motion the maximum amount of time is a distribution strategy called cross-docking. Used with particular success by Wal-Mart, cross-docking involves moving incoming shipments directly across the dock to outward-bound carriers. The inventory thus transferred may literally never be at rest in the warehouse.
Another example of cross-docking can be taken from the airline industry. When a passenger travels from Seattle to New York, he or she might be cross-docked in Chicago. The airline has configured their network in this way as opposed to having direct flights from city to city. Passengers are not warehoused per se but simply pass through the airport in an hour or two, getting off of one plane and onto another. At the end of the day, ideally the airport should be empty, as should all cross-docking locations.
A trailer, railcar, or barge can be considered a kind of mobile warehouse. Rolling inventory should be closely tracked by GPS to facilitate rapid adjustments if a shipment is delayed or lost or if a customer changes an order at the last minute.
- Use postponement centers. Avoid filling warehouses with the wrong mix of finished goods by setting up postponement centers to delay product assembly until an actual order has been received.
- Mix shipments to match customer needs. Match deliveries more precisely to customer needs by mixing different SKUs on the same pallet and by mixing pallets from different suppliers.
- Don’t wait in line at customs. Reduce the time spent in customs by clearing freight while still on the water or in the air.
Reducing Supply Chain Partners to an Effective Number:
Though you have to watch out for tradeoffs in effectiveness when knowing what is logistics and reducing the number of logistics partners, you can generally increase efficiency by doing so. If possible, look for an entire echelon (tier) you can do without such as all the wholesale warehouses or factory warehouses
The more partners there are in the chain, the more difficult and expensive the chain is to manage. Handoffs among partners cost money and eat up time. Having many partners means carrying more inventory. Reducing the number of partners can reduce operating costs, cycle time, and inventory holding costs. There is, however, some lower limit below which you create more problems than you solve. If you eliminated all partners other than your own firm, you’d be back to the vertical integration strategy pursued in a simpler marketplace during the early 20th century by U.S. auto-maker Henry Ford.
In regard to inventory management, pooling risks is a method of reducing stockouts by consolidating stock in centralized warehouses. The risk of stockouts increases as supply chains reduce the safety stock held at each node and move toward Just-in-Time ordering procedures. With every entity attempting to keep inventory costs down in this manner, the risk of stockouts rises if buying exceeds expectations. Statistically speaking, when inventory is placed in a central warehouse instead of in several smaller warehouses, the total inventory necessary to maintain a level of service drops without increasing the risk of stockouts. An unexpectedly large order from any one customer will still be small in relation to the total supply available.
Risk pooling also works with parts inventories. Risk pooling is defined as follows:
- A method often associated with the management of inventory risk. Manufacturers and retailers that experience high variability in demand for their products can pool together common inventory components associated with a broad family of products to buffer the overall burden of having to deploy inventory for each discrete product.
- By using a central warehouse to hold parts common to many products, a supply network can reduce storage costs and the risks of stockouts that would be experienced in smaller, decentralized warehouses.
- There are tradeoffs to consider. Because the central warehouse may be further away from some production facilities than the smaller warehouses would be, lead times and transportation costs are likely to go up. Again, logistics has to be managed from the point of view of improving the value of the overall system, not just one part of the system.
Flow of Goods and Information:
If you recall, there are flows of goods (product or inventory) and information in each supply chain. Customer information flows through the enterprise via orders, sales activity, and forecasts. As products and materials are procured, a value-added flow of goods begins. The enterprise must have internal process integration and collaboration between functions as well as alignment and integration across the supply chain.
With a foundation in the role of logistics and its operational areas, we’re ready to discuss how and why firms outsource some or all of their logistics operations.