Logistics is a military term that refers to the management of various activities like transportation, inventory, warehousing right from the stage of processing the raw materials by the manufacturer to convert it into finished goods till they are made available to the customer for use. While logistics management helps to optimize the flow of material within the organization, supply chain management crosses the boundaries of organization extending material flow integration upwards to suppliers and also descending down to customers. Logistics basically represents two primary product movements, (i) Physical supply, concerned with supply of raw materials, component parts, and other related supplies necessary for the manufacturing process. This comes under the purchase function (Materials Management) and (ii) Physical distribution, concerned with delivering the finished product to customers and the middlemen. This comes under the marketing management that is also called as Marketing Logistics.
Marketing logistics is the process of delivering the finished goods to the intermediaries as well as customers. An efficient delivery system helps to reduce the costs, improve customer service, and minimize time that finally helps to gain customer loyalty. A physical distribution system involves various tasks (as given in the table below) that interact with each other and play an important role in the overall performance of the logistics system.
|1.||Transportation||An important activity that involves movement of goods from the manufacturer to the customer.|
|2.||Warehousing||A place where goods are stored till they are made available in the market place when needed.|
|3.||Inventory Management||Ensures that right mix of products are available at right place/time in sufficient quantity.|
|4.||Packaging||Protects the products, maximizes use of warehouse space, maintains product identity.|
|5.||Materials Handling||Maximizes speed, minimizes cost of order-picking, moving to and from storage, loading and unloading operations.|
|6.||Order Processing||Communicates requirements to appropriate locations through inventory management. Starts the physical distribution process.|
|7.||Production Planning||Goods are made available for inventory. Planning of warehouse facility utilization, transportation requirement|
|8.||Customer Service||Establishes customer service levels with marketing objectives as well as cost limitations|
|9.||Plant Location||Facilities planning (factory and warehouse location) to ensure capacity & reduce transportation costs|
A particular logistics activity cannot be performed without evaluating its impact on other areas. For instance, the objective of maximized customer service may develop into a conflict with the objective of minimized distribution cost. Hence, total cost approach has to be considered to manage such inconsistency.
The total cost approach focuses to balance two essential variables: (i) total distribution costs, and (ii) the level of logistical service provided to the customers. The total cost approach is designed in such a way that it tries to achieve a combination of cost and service levels that maximizes the profits to the company and the channel members.
- In this approach, the total cost of distribution is considered instead of the individual cost of the elements of physical distribution as the decision made for one logistical variable affects all or some of the other logistics variables. For example, if inventory is reduced below the required quantity in order to reduce inventory costs, it may result in stockouts and increase in order backlogs. This may necessitate extra productions to provide the stockout items and air-freight them at high cost to customers whose production stopped due to non-delivery of products. All this would finally lead to reduction in future orders from the unsatisfied customers due to poor delivery performance. Thus, to save a small individual cost, the total cost substantially increased. The interactions among logistics activities (i.e. transportation, inventory, warehousing) involves a cost trade off as these cost elements are sometimes in economic conflict with one another. Thus, manager must be willing to trade-off a cost increase in one activity for a larger cost decrease in another activity that should finally result in reduced total logistics costs.
- Service aspect is the other half of the total cost approach. It is to be understood that all customers or products do not require same level of service. Each element of service has different levels of importance that the industrial marketer should recognize. The cost involved in providing the level of service must be evaluated in light of the revenue generated. Once the important elements of customer service are determined by the industrial marketer, he should set goals of customer service levels for each service element, compare the actual with goals and finally take corrective actions to minimize the difference.