Business objectives of logistics systems

The General objectives of the logistics can be summarized as:

  • Cost reduction
  • Capital reduction
  • Service improvement

The specific objective of an ideal logistics system is to ensure the flow of supply to the buyer, the:

  • right product
  • right quantities and assortments
  • right places
  • right time
  • right cost / price and,
  • right condition

This implies that a firm will aim at having a logistics system which maximizes the customer service and minimizes the distribution cost. However, one can approximate the reality by defining the objective of logistics system as achieving a desired level of customer service i.e., the degree of delivery support given by the seller to the buyer. Thus, logistics management starts with as curtaining customer need till its fulfillment through product supplies and, during this process of supplies, it considers all aspects of performance which include arranging the inputs, manufacturing the goods and the physical distribution of the products. However, there are some definite objectives to be achieved through a proper logistics system. These can be described as follows:

1. Improving customer service:

As we know, the marketing concept assumes that the sure way to maximize profits in the long run is through maximizing the customer satisfaction. As such, an important objective of all marketing efforts, including the physical distribution activities, is to improve the customer service. An efficient management of physical distribution can help in improving the level of customer service by developing an effective system of warehousing, quick and economic transportation, all maintaining optimum level of inventory. But, as discussed earlier, the level of service directly affects the cost of physical distribution. Therefore, while deciding the level of service, a careful analysis of the customers’ wants and the policies of the competitors is necessary. The customers may be interested in several things like timely delivery, careful handling of merchandise, reliability of inventory, economy in operations, and so on. However, the relative importance of these factors in the minds of customers may vary. Hence, an effort should be made to ascertain whether they value timely delivery or economy in transportation, and so on. One the relative weights are known, an analysis of what the competitors are offering in this regard should also be made. This, together with an estimate about the cost of providing a particular level of customer service, would help in deciding the level of customer service.

2. Rapid Response:

Rapid response is concerned with a firm’s ability to satisfy customer service requirements in a timely manner. Information technology has increased the capability to postpone logistical operations to the latest possible time and then accomplish rapid delivery of required inventory. The result is elimination of excessive inventories traditionally stocked in anticipation of customer requirements. Rapid response capability shifts operational emphasis from an anticipatory posture based on forecasting and inventory stocking to responding to customer requirements on a shipment-to-shipment basis. Because inventory is typically not moved in a time-based system until customer requirements are known and performance is committed, little tolerance exists for operational deficiencies

3. Reduce total distribution costs:

Another most commonly stated objective is to minimize the cost of physical distribution of the products. As explained earlier, the cost of physical distribution consists of various elements such as transportation, warehousing and inventory maintenance, and any reduction in the cost of one element may result in an increase in the cost of the other elements. Thus, the objective of the firm should be to reduce the total cost of distribution and not just the cost incurred on any one element. For this purpose, the total cost of alternative distribution systems should be analyzed and the one which has the minimum total distribution cost should be selected.

4. Generating additional sales:

Another important objective of the physical distribution/logistics system in a firm is to generate additional sales. A firm can attract additional customers by offering better services at lowest prices. For example, by decentralizing its warehousing operations or by using economic and efficient modes of transportation, a firm can achieve larger market share. Also by avoiding the out-of-stock situation, the loss of loyal customers can be arrested.

5. Creating time and place utilities:

The logistical system also aims at creating time and place utilities to the products. Unless the products are physically moved from the place of their origin to the place where they are required for consumption, they do not serve any purpose to the users. Similarly, the products have to be made available at the time they are needed for consumption. Both these purposes can be achieved by increasing the number of warehouses located at places from where the goods can be delivered quickly and where sufficient stocks are maintained so as to meet the emergency demands of the customers. Moreover, a quicker mode of transport should be selected to move the products from one place to another in the shortest possible time. Thus, time and place utilities can be created in the products through an efficient system of physical distribution.

6. Price stabilization:

Logistics also aim at achieving stabilization in the prices of the products. It can be achieved by regulating the flow of the products to the market through a judicious use of available transport facilities and compatible warehouse operations. For example, in the case of industries such as cotton textile, there are heavy fluctuations in the supply of raw materials. In such cases if the market forces are allowed to operate freely, the raw material would be very cheap during harvesting season and very dear during off season. By stocking the raw material during the period of excess supply (harvest season) and made available during the periods of short supply, the prices can be stabilized.

7. Quality improvement:

The long-term objective of the logistical system is to seek continuous quality improvement. Total quality management (TQM) has become a major commitment throughout all facets of industry. Overall commitment to TQM is one of the major forces contributing to the logistical renaissance. If a product becomes defective or if service promises are not kept, little, if any, value is added by the logistics. Logistical costs, once expended, cannot be reversed. In fact, when quality fails, the logistical performance typically needs to be reversed and then repeated. Logistics itself must perform to demanding quality standards. The management challenge of achieving zero defect logistical performance is magnified by the fact that logistical operations typically must be performed across a vast geographical area at all times of the day and night. The quality challenge is magnified by the fact that most logistical work is performed out of a supervisor’s vision. Reworking a customer’s order as a result of incorrect shipment or in-transit damage is far more costly than performing it right the first time. Logistics is a prime part of developing and maintaining continuous TQM improvement.

8. Life-Cycle support:

A good logistical system helps to support the life cycle. Few items are sold without some guarantee that the product will perform as advertised over a specified period. In some situations. the normal value-added inventory flow toward customers must be reversed. Product recall is a critical competency resulting from increasingly rigid quality standards, product expiration dating and responsibility for hazardous consequences. Return logistics requirements also result from the increasing number of laws prohibiting disposal and encouraging recycling of beverage containers and packaging materials. The most significant aspect of reverse logistical operations is the need for maximum control when a potential health liability exists (i.e.. a contaminated product). In this sense, a recall program is similar to a strategy of maximum customer service that must be executed regardless of cost. Firestone classical response to the tyre crisis is an example of turning adversity into advantage. The operational requirements of reverse logistics range from lowest total cost, such as returning bottles for recycling, to maximum performance solutions for critical recalls. The important point is that sound logistical strategy cannot be formulated without careful review of reverse logistical requirements.

9. Movement consolidation:

As the logistical system aims at cost reduction through integration, consolidation One of the most significant logistical costs is transportation. Transportation cost is directly related to. the type of product, size of shipment, and distance. Many Logistical systems that feature premium service depend on high-speed, small shipment transportation. Premium transportation is typically high-cost. To reduce transportation cost, it is desirable to achieve movement consolidation. As a general rule, the larger the overall shipment and the longer the distance it is transported, the lower the transportation cost per unit. This requires innovative programs to group small shipments for consolidated movement. Such programs must be facilitated by working arrangements that transcend the overall supply chain.

Recommended reading: Business importance of logistics

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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