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Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Name of the Staff : Dr.Vanishree , Assistant Professor , Department of Commerce (IB), GAC,Cbe
Name of the subject : Fundamentals Of Logistics
Subject Code : 18BIB42C
Unit :I
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
FUNDAMENTALS OF LOGISTICS
1. MARKETING LOGISTICS SYSTEM
Logistics is concerned with getting products and service where they are needed when
they are desired. Consumer’s products to be readily available and fresh, that they take for
granted a high level of logistical competency. No marketing or manufacturing process can be
accomplished without logistical support.
Logistics has been performed since the beginning of civilization. However, in today’s
world, where there is realisation of 'Global Village' and 'Borderless World', implementing the
most efficient practice of logistics has become one of the most exciting and challenging areas
of business. The operating responsibility of logistics is the geographical positioning of raw
materials, work-in-progress and finished inventories where required at the lowest cost
possible.
CONCEPT
Business logistics is the planning, organising and controlling of all move- store
activities that facilitate product flow from the point of raw material acquisition to the point of
final consumption, and the necessary information flows, for the purpose of providing a
sufficient level of customer service in a cost-effective manner.
The origins of business logistics can be traced to developments that occurred in
military logistics during World War II. Ability to move and store personnel and supplies
efficiently contributed much to the success of the war effort.
Business logistics is a comprehensive system. It involves the integration of
information, transportation, inventory, warehousing, material handling and packaging. These
jobs combine to make overall logistics management a challenging and rewarding career. Over
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
the years, many titles have been used to describe all or parts of logistical-integrated supply
chain process, namely business logistics, physical distribution, materials logistics
management materials management, physical supply, logistics of distribution, marketing
logistics, inbound logistics and total distribution.
In 1991, the Council of logistics Management modified its 1976 definition of physical
distribution management by first changing the term to logistics and then changing the
definition as follows:
"Logistics is the process of planning, implementing and controlling the efficient,
effective flow and storage of goods, services and related information from the point of origin
to the point of consumption for the purpose of conforming to customer requirements."
The definition reflects the need for total movement management from point of
material procurement to location of finished product distribution.
OBJECTIVES
Logistics adds value when inventory is correctly positioned to facilitate sales. But
creating logistics value is costly. Logistics expenditure typically range from 5 to 35 per cent
of sales depending on the type of business, geographical area of operation, and weight/value
rates of products and materials. Logistics accounts for one of the highest costs of doing
business; second only to materials in manufacturing or cost of goods sold in wholesaling or
retailing. Logistics though vital to business success, is also expensive.
But in spite of cost, what most firms are interested in, is not only cost reduction, but
also the challenge in achieving logistical competency to gain competitive advantage.
Firms that enjoy world-class logistical competency can gain competitive advantage by
providing customers with superior service. By performing above industry average in terms of
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
inventory availability as well as speed and consistency of delivery, logistically sophisticated
firms are attractive supplier and ideal business partners.
The overall effect is that, the goal of logistics is to achieve a targeted level of
customer service at the lowest possible total cost. That is, it aims to service the demand
created by marketing efforts. By efficient servicing of the demand, customer satisfaction is
aimed at, such that, a network of satisfied customer is built in, learning to increase in the
market share and competitive advantage resulting in higher profitability of the business.
LOGISTICS AND BUSINESS PROFITABILITY: Tangible improvements in cost quality
and service are critical in modern competitive markets. More and more senior executives now
realise the importance of logistics to the success of their corporate strategies. In the
companies, logistics excellence enables them to turn an activity traditionally considered a
"service function" into a strategic resource contributing measurably to market share and
profitability.
LOGISTICS AND THE VALUE CHAIN CONCEPT: To gain competitive advantage, for
creating and sustaining superior Performance, Michael Porter describes how a company can
put generic strategies (cost leadership, differentiation and focus into practice.
The value chain concept (adopted from Michael Porter's Model) identifies five
primary activities, [namely (l) Inbound logistics, (2) Operations, (3) Outbound logistics, (4)
Marketing and Sales, (5) Service] backed by support activities, [namely (i) Company
infrastructure, (ii) Organisation, People and Methods, (iii) Systems and Technology and (iv)
Procurement] all together form the activities which creates value to the product / service of
the business firm.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Porter's Value Chain
Manufacturing companies create value by acquiring raw materials and using them to
produce something useful. Retailers bring together a range of products and present them in a
way that's convenient to customers, sometimes supported by services such as fitting rooms or
personal shopper advice. And insurance companies offer policies to customers that are
underwritten by larger re-insurance policies. Here, they're packaging these larger policies in a
customer-friendly way, and distributing them to a mass audience.
The value that's created and captured by a company is the profit margin:
Value Created and Captured – Cost of Creating that Value = Margin
The more value an organization creates, the more profitable it is likely to be. And
when you provide more value to your customers, you build competitive advantage.
Understanding how your company creates value, and looking for ways to add more value, are
critical elements in developing a competitive strategy. Michael Porter discussed this in his
influential 1985 book "Competitive Advantage," in which he first introduced the concept of
the value chain.
A value chain is a set of activities that an organization carries out to create value for
its customers. Porter proposed a general-purpose value chain that companies can use to
examine all of their activities, and see how they're connected. The way in which value chain
activities are performed determines costs and affects profits, so this tool can help you
understand the sources of value for your organization.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Elements in Porter's Value Chain
Rather than looking at departments or accounting cost types, Porter's Value Chain
focuses on systems, and how inputs are changed into the outputs purchased by consumers.
Using this viewpoint, Porter described a chain of activities common to all businesses, and he
divided them into primary and support activities, as shown below.
Primary Activities
Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:
Inbound logistics – These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in creating value
here.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Operations – These are the transformation activities that change inputs into outputs
that are sold to customers. Here, your operational systems create value.
Outbound logistics – These activities deliver your product or service to your
customer. These are things like collection, storage, and distribution systems, and they may
be internal or external to your organization.
Marketing and sales – These are the processes you use to persuade clients to
purchase from you instead of your competitors. The benefits you offer, and how well you
communicate them, are sources of value here.
Service – These are the activities related to maintaining the value of your product or
service to your customers, once it's been purchased.
Support Activities
These activities support the primary functions above. In our diagram, the dotted lines
show that each support, or secondary, activity can play a role in each primary activity. For
example, procurement supports operations with certain activities, but it also supports
marketing and sales with other activities.
Procurement (purchasing) – This is what the organization does to get the resources
it needs to operate. This includes finding vendors and negotiating best prices.
Human resource management – This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
Technological development – These activities relate to managing and processing
information, as well as protecting a company's knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Infrastructure – These are a company's support systems, and the functions that allow
it to maintain daily operations. Accounting, legal, administrative, and general
management are examples of necessary infrastructure that businesses can use to their
advantage.
Companies use these primary and support activities as "building blocks" to create a valuable
product or service.
Using Porter's Value Chain
To identify and understand your company's value chain, follow these steps.
Step 1 – Identify subactivities for each primary activity
For each primary activity, determine which specific subactivities create value. There are three
different types of subactivities:
Direct activities create value by themselves. For example, in a book publisher's
marketing and sales activity, direct subactivities include making sales calls to bookstores,
advertising, and selling online.
Indirect activities allow direct activities to run smoothly. For the book publisher's
sales and marketing activity, indirect sub activities include managing the sales force and
keeping customer records.
Quality assurance activities ensure that direct and indirect activities meet the
necessary standards. For the book publisher's sales and marketing activity, this might
include proofreading and editing advertisements.
Step 2 – Identify sub activities for each support activity.
For each of the Human Resource Management, Technology Development and
Procurement support activities, determine the sub activities that create value within each
primary activity. For example, consider how human resource management adds value to
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
inbound logistics, operations, outbound logistics, and so on. As in Step 1, look for direct,
indirect, and quality assurance sub activities.
Then identify the various value-creating subactivities in your company's
infrastructure. These will generally be cross-functional in nature, rather than specific to each
primary activity. Again, look for direct, indirect, and quality assurance activities.
Step 3 – Identify links
Find the connections between all of the value activities you've identified. This will
take time, but the links are key to increasing competitive advantage from the value chain
framework. For example, there's a link between developing the sales force (an HR
investment) and sales volumes. There's another link between order turnaround times, and
service phone calls from frustrated customers waiting for deliveries.
Step 4 – Look for opportunities to increase value
Review each of the sub activities and links that you've identified, and think about how
you can change or enhance it to maximize the value you offer to customers (customers of
support activities can be internal as well as external).
Porter (it is believed) is the first leading business scholar to recognise how logistics
function fits into the business to acknowledge this process and link it specifically to
competitive advantage. In the value chain concept developed by him logistics represents two
of the five primary business activities that add value to a product. The value chain concept
may be used to identify and understand the specific sources of competitive advantage and
how they relate to buyer value. Porter asserts that competitive advantage is derived from the
value a company creates for its buyers.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
LOGISTICS INTERFACE WITH MARKETING
Earlier in this century, functions now grouped under the term logistics were part of
marketing. In 1950's 60's, marketers tended to focus on product promotion and development,
neglecting areas of warehousing, transport and inventory control. The realisation that storage
and distribution costs were absorbing an increasing percentage of sales revenue sparked a
renewed interest in this area in late .1960's and 70's.
Over time, logistics assumed primary responsibility for warehousing, Inventory and
transport within many organisations, with marketing responsible for negotiation, promotion
and selling. Now days it has been recognised that marketing and logistics functions are
strategic resources, to be best employed as part of an overall strategic plan. Logistics has the
task of ensuring that demand generated by marketing is actually serviced or fulfilled as
shown figure 1.1.
Logistics is concerned with getting products and services where they are needed when
they are desired. Lt is difficult to visualise accomplishing any marketing or manufacturing
without logistical support.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
MARKETINF LOGISTICS INTERFACE
Logistics has been performed since the beginning of civilisation. However, implementing
best practice of logistics has become one of the challenging operational areas of business.
Logistics involves the integration of information, transportation, warehousing,
material handling and packaging.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Logistics in many a company accounts for 20 to 25 per cent of the cost of doing
business. Some of the costs involved in logistics between two points are:
Extra inventory at the factory
Packing
Transport to dock and loading charges
Paper work
Transportation charges of ocean liner or airline
Inventory enroute and waiting to clear customs
Customs broker charge and other paper work
Import duty
Repackaging if necessary
Inspection at the sales outlet
LOGISTICS AND PRODUCT LIFE CYCLE: To plan marketing strategy in a dynamic
context, managers often use life cycle modelling. Emphasis in marketing mix varies
according to the stage of product life cycle.
STAGE EMPHASIS IN MARKETING MIX
Introduction Promotion
Growth Distribution
Maturity Price
Saturation Price
Decline Cost Reduction
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
The levels of logistics support required by marketing vary as a product moves through
the different stages of PLC.
In the early stages timely, cost-effective fulfilment Of orders is a major requirement in
ensuring initial acceptance of the product.
Later as sales become slow and product moves into the maturity and saturation edges,
the emphasis changes to trimming costs the product faces stiff price competition.
Unless logistics managers understand what marketing is trying to achieve with each product
they cannot hope appropriate levels of logistics supports for the marketing effort.
The marketing consists of the price, product, promotion and physical distribution. The
interface of logistics with marketing as depicted by John Gattorna (figure 1.1) brings out the
interaction between the two marketing through its activity centres of (I) product development,
(ii) personal selling [iii]advertising. (iv) Sales promotion, (v) channels of distribution and
(VI) pricing creates demand for the product / service. But if this created demand is to be
capitalised, then it should be serviced promptly and effectively. Herein comes the important
contribution of logistics.
Logistics which consists of the activity centres namely, (i) transportation (inbound /
outbound), (ii) warehousing, (iii) inventory, (iv) management, (v) unitisation and (vi)
communications, contributes towards servicing the demand created by marketing efforts.
Marketing objective is to allocate resources to the marketing mix in such a manner as to
maximise the long-run profitability of the firm.
Logistics objective is to minimise total cost given the customer service objective,
where total costs equals transportation costs, warehousing costs, Order processing and
information costs, lot quantity costs, inventory carrying costs.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Marketing and logistics efforts are highly complementary. Product based decisions
and unitisation concepts have to be supportive of each other. Channel of distribution
decisions will greatly depend on the transportation and warehousing policies of the firm.
Sales promotion measures must be in coordination with the level of logistical competency of
the firms. Competitive pricing decisions can be easily reached at, if through efficient
management of the activity centres of the logistics least cost level is maintained. Thus,
marketing and logistics managers begin to think strategically, the coordination built in will
create a competitive edge for the firm, over its other competitors.
LOGISTICS SYSTEM ELEMENTS:
Logistical competency is achieved by coordinating into a network design:
1. Information
2. Transportation
3. Inventory
4. Warehousing
5. Material handling
6. Packaging/Unitisation
When economists originally discussed supply-and-demand relationships, facility
location and transportation cost differentials were assumed to be either non-existent or equal
among competitors.
Given a facility network and information capability, transportation is the operational
area of logistics (that geographically positions inventory. Because of its fundamental
importance and visible cost, transportation has received considerable managerial attention
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
over the years. Almost all enterprises, big and small, have managers responsible for
transportation. Finding and managing the desired transportation mix is a primary
responsibility of logistics.
Network of three of the functional areas of logistics— information, transportation,
and inventory — can be engineered into a variety of different operational arrangements. Each
arrangement will have the potential to achieve a level of customer service at an associated
total cost. In essence, these three functions combine to create a system solution for integrated
logistics. The final functions of logistics — warehousing, material handling, and packaging
— also represent an integral part of an operating solution. However, these functions do not
have the independent status of the three previously discussed. Warehousing, material
handling and packaging are an integral part of other logistics areas. For example,
merchandise typically needs to be warehoused at selected times during the logistics process.
Transportation vehicles require material handling for efficient loading and unloading. Finally,
the individuals are most efficiently handled when packaged together into shipping cartons or
other types of containers.
Logistics is viewed as the competency that links an enterprise with its customers and
suppliers. Information from and cus10tncrs flows through the enterprise in the form of sales
activity, forecasts, and orders. The whole process is viewed in terms of two interrelated
efforts, inventory flow and information flow.
Information flow is a key element of logistics operations, information flow, increases
both operating cost and decreases customer satisfaction. Electronic information movement
and management provide the opportunity to reduce logistics expense through increased
coordination and to enhance service by offering information to customers.
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
Information flow was often overlooked because it was not viewed as being important
to customers. The Council of Logistics Management recognized this change in 1988 when it
incorporated "material, in-process, finished goods and formation" into its definition of
logistics.
Transportation is a key activity in the logistics value chain as it moves through the
various stages of production and ultimately to the consumer. Primary functions, include
product movement, product storage and integration of international production and
distribution operation. The major principles involve economies of scale and economies of
distance.
While effective distribution systems should not be designed to hold inventory for an
excessive length of time, there are occasions when inventory storage is justified.
While the traditional warehousing role has to maintain a supply of goods protect
against uncertainty, contemporary warehousing offers many other value-added services.
These can describe in terms of economy and service benefits. Economic include
consolidation, break bulk and cross dock, processing/ postponement and stocking service
benefits include spot stocking assortment mixing product support and market presence.
The handling of products is a key to warehouse productivity. Handling activities
include receiving, in storage handling, and shipping. Packaging has a significant impact on
the cost and of the logistical system. Integrated logistics approach to packaging operations
can yield dramatic savings.
A marketing mix is a compilation of activities designed to attract customer while
simultaneously achieving business objectives. The so-called four p's product/ service,
promotion, price, and place — constitute a generic mix. The key to formulating an effective
Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih
mix strategy is to integrate resource committed to these activities into an effort that
maximizes customer impact. Logistics ensures that customer requirements involved in timing
and of inventory and other related services are satisfactorily Thus, output of logistical
performance is customer service Logistical competence a tangible way to attract customers
who place a premium on time and place related performance.
Thus, the discussion on the objectives, logistics interface with marketing and the
system elements brings out the depth of the scope of logistics in efficient functioning of any
business entity. The key to world-class logistics to achieve integration of internal and external
objectives requires clear identification concerning the role that logistical competency is to
play in overall enterprise strategy.