PROJECT MANAGEMENT

Logistics In Supply
UNIT-2 Chain Management

Learning Outcomes
By the end of this unit the learner will be able to:

 Describe the activities involved in Logistics.

 Outline aims of the Logistics and recognise their importance in businesses.
 Discuss the Current Trends in Logistics.

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Unit 2
Logistics in Supply Chain Management
Activities Involved In Logistics
Logistics is all about mobility of materials and their storage via supply chain. It includes the following
activities if you inspect the supply chain.

• Procurement or Purchasing.
After the initiation of procurement orders, the flow material in organization starts. The
procurement order imposes responsibilities on the staff to find best possible suppliers, negotiate
with them the terms and conditions, manage delivery orders, make insurance and payment and
do everything that is essential for having smooth flow of material within an organization.

• Inward Transport Or Traffic

The materials that are procured need to be transported to the organization. Hence, the
choice of the type of transport is another important decision. It is the duty of the procurement
staff to find the best transportation type (road, rail, air, and so on), make sure that it fulfils all
safety and legal requirements and deliver within deadline with reasonable cost.

• Receiving
It assures that timely delivery of material, receipt acknowledgement on time, unloading of
delivery vehicles, and inspection of material.

• Warehousing Or Stores
It keeps materials into storage and keeps monitoring them till needed. There are kinds of
materials that need special care like drugs, frozen food, and chemicals etc. It also takes into
consideration that whether materials are available on time when needed and it also makes sure
that materials are kept in good condition and are being treated and packaged properly.

• Stock Control
It creates regulations for inventory. It also monitors the stored material, the overall cost,
stock level, order timing, customer service, order sizes, and so on.

• Order Picking
This finds the needed materials and moves them away from stores. Materials ordered by
customers are located, evaluated, and then, moved to a departure area for loading into vehicles.
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• Materials Handling
It looks after the movement of materials while they are being used in operations within an
organization. It takes care of movement of material during operations as they move from one
step to another and also up to some extent, from stores as well. The objective is to make this
movement as efficient as possible by using short routes, suitable equipment utilization, avoiding
potential damages, and special packaging done for protection.

• Outward Transport
It carries materials from the departures to the customers.

• Physical Distribution Management

It is a term that is used for the delivery of final goods to customers. It also includes outward
transportation. It bears important linkage with marketing department and keeps an eye on
downstream activities.

• Recycling, Returns, and Waste Disposal.

The function of logistics is vast that it even never ends after delivery to customers. There
are many problems that can potentially happen in future. These may include faults and damages
associated with materials. Activities that are concerned with return materials back to vendors are
called reverse logistics or reverse distribution.

• Location
Logistics activities are not confined to single locations. For example, finished goods stock
can be stored at the end of the production process. It is necessary for the logistic to select
locations with careful analysis.

• Communication
Along with flow of materials, the smooth flow of communication is also essential. The
entire supply chain runs through communication and passing information regarding customer
demands, products, need of material movement, stock levels, problems, timings, costs, and so
on.

According to many logistics managers, maintain the coordination and communication for
effective movement of goods is very challenging. Many researchers and authors have described
supply chain as the processing of information not just movement of materials.

Sometimes other activities like sales forecasting, customer service management, production scheduling,
third party operations, overseas liaison and so on can also be included in logistics. The boundaries should
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be clear between functions, but there is a need to recognise that they all work together to result in an
efficient flow of materials.

Organising Logistics
Logistics in organisations appear in different forms. The arrangement of activities varies from
organization to organization but there is without doubt no single ‘best’ way. The scale of logistics
activities also depends upon scale of organization. A small organization might have just one person to
look after the things while in large scale organization, over hundreds of workers might be there under
the department. Sometimes, organizations that lack physical and financial resources for in house logistics
department outsource this function to outside third parties.

Aims of Logistics
Logistics looks after the entire supply chain. This function is also termed as supply chain management.
Researchers have been debating upon the scope of logistics and supply chain management, since long.
Usually logistics is supposed to have narrower scope having being restricted to a single organization than
supplies chain management that is supposed to be associated to more than one related organizations.
However, this paper will refer the both as same. This assumption has also been taken by Institute of
Logistics and Transport that has given the following official definitions.

LOGISTICS
It is the time based allocation of resources or the long term management of the entire supply chain.
The SUPPLY-CHAIN represents a chain of activities and events that aim to serve customers materials
needs.
Logistics managers basically perform two major functions. First, they need to carry out the procedure for
movement of materials into, within and outside the organization. Second, they are required to keep
these procedure and movement of materials as efficient as possible.

The terms “efficient” is bit vague. People usually refer this term to low cost, minimum input and
wastage, quick delivery, higher productivity and few mistakes. However, restricting efficiency just to
these terms would not be justified and real objectives of the organization are wider in scope than usually
assume by many managers.

The success of any business solely depends upon its customer satisfaction. If it does not please
customers, it is doubtful to stay alive in the long term, left alone making profit, have more return on
assets, more shareholder value, or attain any other means of success.

Unfortunately, customers see any business or a product in a whole package consisting of easy of buying,
quality, price, features, styles, delivery, defects, and sales staff. Most of these factors greatly depend

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upon effective functioning of logistics department. So, a good customer service and care is not possible
without logistics as it arranges and looks after the movement of materials in the best possible way in
order to satisfy the customers to the best.

Thus, the overall objective of Logistics is to attain high customer contentment. It must offer a high
quality service with lowest possible costs for customers.

Importance of Logistics
Essential and Expensive
Logistics is the backbone for any organization as without it no movement of material occurs, no
production is achieved, no product is delivered and thus it leads to zero customer satisfaction.

The logistics related costs vary from material to material type, however by using latest logistics
technologies; cost can be reduced to minimum.

Effects on Financial Performance

Logistics is an expensive function, though; it holds a big impact on the financial performance of the
organization.

The impact can be illustrated by discussing various financial terms, starting from the Return on Asset.

The return on assets is the pre-tax profit that an organisation earn, divided by the worth of the assets
utilized.
The formula is:

Return on assets = profits earned

Assets employed
This figure actually gives an accurate view that how well the organization has been using its resources.
The higher this figure, the better is the performance, whereas, the assets can be both current assets
(cash, stocks, and receivable etc) and fixed assets (building, equipments etc).

Effective movement of material leads to lower stock level. Though it means less current assets, it can be
debated that it also lessen the number of fixed assets and increasing profit.

 Current Assets.
Effective functioning leads to lower stock level and thus lesser current assets. By saving the cash invested
in stocks, organization can use it for more lucrative production opportunities and reduce its dependence
on borrowing.
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 Fixed Assets.
Fixed assets can be building, equipment, land, and property etc. Logistics does not only employ all these
resources but the transport fleets, warehouses, material handling machines, and the other related
facilities also come under the control of logistics. These are also fixed assets.

 Sales.
If a product is really innovative and appealing, then, logistics can make it even more successful by making
it readily available in the market and thus can lead to higher sales and higher market share.

 Profit Margin.
Effective functioning of logistics leads to lower costs, which helps increase profit.

Stocks Current

assets

Property, Fixed
Assets
equipment, assets

plant, etc.

Customer Return on
Sales
satisfaction assets

Profit
Operating Profit

costs margin

Product Price

features
Figure 2.1Influence of logistics on ROA

 Price.

Logistics can actually justify the pricing of products by ensuing that it is readily available in the market,
speedy delivery and shorter lead time. Thus it helps to make organization’s appealing products to get
premium price.

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It should be noted the first two indicators were related to lower current assets while the other three
were related to higher profit. These indicators together raise ROA and have positive impacts on share
price, borrowing and ROI.

Current Trends in Logistics

Improving Communications
With the passage of time, logistics has changed and adopted new trends. The major change observed
nowadays is the use of latest technology on an increasing basis. The technology is directly getting
involved in movement of materials, for example, electronic guidance system and packages identification.
However, the impact and recent trend in communication is the most interesting trend to be discussed.

In the past, organizations had to rely on a manual system and paper works for generating material
description, price request, orders, invoices, conformations, agreements, and so on. It used to take lots of
time and was still not error free. In last few decades, latest and advancer technologies have shifted the
entire system from manual to electronic mode. Development started initially with fax machines that
used to send electronic copies of orders to remote locations in just few seconds, however, it requires the
entire procedure to be completed i.e. printing of paper, feeding into fax machine and the sending over
telephone lines.

In 1990s, the concept of Electronic Data Interchange (EDI) removed the need of intermediaries to
exchange data. Early consumers were supermarket who attached their stock control system straight to
suppliers’ order processing system. In case of stock needed the order could be generated and sent to
suppliers automatically. Then the use of EPOS (Electronic Point of Sale) greatly helped in reducing paper
work, lowering transactions’’ cost faster interaction, more collaboration, less number of errors and
strategic business relations.

Another technology is called EFT (Electronic Fund Transfer) which automatically debits the client’s bank
account credits the vendor’s on the acknowledgement of materials’ delivery.

Improving Customer Service

Every organization wants to keep its logistics cost to the minimum level. Lower cost ensures
competitiveness and satisfaction of customers as most of them want to buy products at lower prices.
Lower cost enables business to sell its products over broader geographic areas, for example, Japanese
manufacturers usually keep lower transportation cost so as to achieve market competency and
advantage in pricing as compared to local producers in other regions.

By effectively, speedily and safely moving products over long distances, there is no need to have any
traditional storeroom or warehouse nearby to customers.

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Other Significant Trends

Some of the most significant trends in logistics include the following:

 Globalisation:

With advanced technologies and improved transport system, physical distances are getting reduced
and the world has become a global village. Businesses are now global in nature in terms of entire
outlook of logistics ranging from buying activities to delivery of finished products across the borders.
Now there is a global market as well. It is increasing the competition in world’s economies as well.
Now organizations have to face competition not just locally but globally as well.
Effective logistics have made access to global markets easy for the business by providing the factors
that encourage global trade. This has provided many advantages to businesses. You must have
notices that many organizations are availing economies of scale by expanding their production
facilities in the areas where the cost is low. This is the reason why German businesses open their
production facilities in Poland, American businesses establish themselves in Mexico and Japanese
tend to operate in China.

 Reduced Number of Suppliers:

In the past, there was a trend of keeping lot of suppliers in contact and working relationship so as to
make the most of the best. This has resulted in increased competition in the past. However, the
latest trend that is being followed today is having selective vendors on board and keeping strategic
relationship with the best.

 Concentration of Ownership:

Larger companies, because of having economies of scale seem to dominate a lot of supply chains.
Though there are many transport companies and shops, but the biggest companies are expanding at
the expanse of smaller one. This is resulting in increased concentration of ownership as observed in
logistics sectors of various economies.

 Outsourcing:

Many organizations seem to take the advantage of specialized firms for logistics tasks, so that they
can pay attention to their core activities and increase their efficiency. According to McKinnon, ‘
outsourcing was one of the dominant business trends of the 1980s and 1990s’ and surveys suggest
that around 30 per cent of logistics expenditure is outsourced in the EU.

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 Postponement:

Conventionally, manufacturers shift finished commodities out of production and hoard them in the
delivery system until they are required. When there are a lot of differences on a basic product, this
can present high stocks of products which are alike.
Postponement shifts nearly finished goods into the distribution system and holds-up final alterations
or customisation till the last possible moment. You can visualize this with ‘package-to-order’, where a
corporation keeps a manufactured goods in stock, but simply puts it in a box written in the suitable
language when it is about to transport an order.
Producers of electrical equipment, such as Hewlett-Packard, Phillips used to construct into their
commodities the transformers and plugs required for different markets. Then they had to maintain
separate stocks of products intended for every country. Now they build the transformer and cables
as distinct, external units. They only maintain stocks of the fundamental, standard products, and
modify them for diverse markets by adding the appropriate transformers and plugs at the last
moment.
The result is much lower stocks.

 Cross-Docking:

Conventional warehouses shift materials into storage, maintain them until required, and then, move
them out in accordance with demand. Cross-docking directs the supply and delivery, so that
merchandise arrives at the receiving region and is transferred directly to a loading area, where they
are loaded onto delivery vehicles.

 Direct Delivery:

More clientele are buying via Web or discovering other ways of trading previously in the supply
chain, like mail order or buying straight from producers. This has the advantages of dropping lead
times, reducing costs to clients, having manufacturers talking directly to their end customers,
allowing clients access to a wider choice of products, and so on. It also implies that logistics has to
shift small deliveries rapidly to final customers. This is optimistic for the growth of couriers and
parcel delivery services like FedEx, DHL, and UPS.

 Other Stock Reduction Methods:

Keeping stock is costly, so organisations frequently look for tricks for reducing the stock in the
supply chain. There are numerous ways of doing this. One method uses just-in-time based
operations to synchronize activities and lessen stock levels. Another way is throughvendor

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managed inventory,where providers administer both their own stocks and those held further
down the supply chain. Enhanced co-ordination lessens overall costs and can award economies of
scale.

 Increasing Environmental Concerns:

There is rising concern about, water pollution, air pollution, energy consumption, urban expansion,
and waste dumping. Logistics does not hold a good standing for environmental safety –
demonstrated by the releases from weighty Lorries, employment of green field locations for
warehouses, calls for new road building, utilization of wide-ranging packaging, ships unlawfully
flushing their energy tanks, oil spillages from tanker accidents, and so on.
On the optimistic side, logistics is shifting to ‘greener’ practices. Businesses use more energy
efficient means of transport, control drain emissions, recycle packaging, switch to environment
friendly options of transport, boost recycling through reverse logistics, add security features to
ships, expand brown-field sites, and so on. They ever more make out that careful administration can
bring both ecological protection and lesser costs. A fair evaluation may be that logistics is making
development on environmental issues, but it would need some time.

 More Collaboration Along The Supply Chain:

Organizations carrying out the function of logistics are aware of the fact that they also have to satisfy final
consumers, if they want to have success. Hence, they should better cooperate than compete with one
another in order to deliver customer satisfaction, in the end. Competitors are not just within the same supply
chain but they are also present in other supply chains. Christopher has very well said,

“Supply chains compete, not companies”.

Further Reading:

 Bowersox, (2008), Supply chain logistics management

 John Coyle, C. Langley, Brian Gibson, Robert Novack, Edward Bardi, (2009),
Supply Chain Management: a Logistics Perspective

 Martin Christopher, (1998), Logistics and Supply Chain Management ePub

eBook

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