How Logistics Productivity Improvement Affects the Economy as a Whole as well as the Position of Individual Consumer?

Generally logistics refers to the inbound and outbound flow and storage of goods , services, and information within and between organisations. The Council of Supply Chain Management Professionals (CSCMP), which is the pre-eminent professional organisation for academics and practitioners in the logistics field, formed in 1963, defined logistics management as ” that part of supply chain management that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods ,services, and related information between the point of origin and the the point of consumption in order to meet customers requirements “.

Logistics Productivity Improvement and the Economy

Logistics has become an enormously important component of the gross domestic product (GDP) of industrialized nations and thus affects the rate of inflation, interest rates, productivity, energy costs and its availability and other aspects of the economy as well. Ever changing business environment due to globalization, lead time reductions, customer orientation, and outsourcing has contributed to the interest in logistics. The increase in global production sharing, the shortening of product life cycles, and the increase of global competition all underline logistics as a strategic source of competitive advantage. Moreover, in order to remain in competitive marketplace and earn reasonable profits, organizations interest in logistics has been increased. Logistics operations have become more efficient due to technological advancements which make it possible to deliver goods on time while reducing the cost involved.

Global market access has been improved over the time with the advancement in technology and trade liberalization resulting in the economic growth and development of the countries. Patterns in the market competition situation are continuously dictating the supply chain flows (i.e. product, price and information flows) in a predictable, timely and cost-effective way. Global firm’s corporate decisions regarding which country to locate in, which suppliers to buy from and which consumer markets to enter are largely based on logistics costs, quality and service level. Therefore, the countries with higher overall logistics costs are more likely to miss the opportunity of globalization.

Nearly every sphere of human activity is affected, directly or indirectly, by the logistics process. Certainly, the improved logistics is expected to have important economic effects. Lower logistics costs and services affect positively in production, distribution and trade and/or retail activities of the firms. Reduced/minimum logistics costs enable a production or distribution facility to serve a wider market area, with potential gains from economies of scale. It also means that a firm can draw supplies from a wider area with potential gains in terms of the cost and/or quality of parts and materials. Logistics costs include transportation costs, costs of owning and operating warehouses, ordering costs, and carrying costs of inventory.

Consequently, the efficiency and reliability of the logistics system affects economic productivity which is the most important determinant of economic performance. Therefore, logistics industry is the artery and the basic industry of the national economic development in the world. Its development level is one of the important marks to evaluate the level of state modernization and comprehensive national strength. Logistics is the accelerator of the economic development and growth.

The World Bank, with its professional and academic partners, has produced the Logistics Performance Index (LPI) to help countries develop logistics reform programs to enable trade and enhance their competitiveness. The LPI is a comprehensive index created to help countries identify the challenges and opportunities they face in trade logistics performance.

Logistics Productivity Improvement and the Individual Customer

In today’s uncertain and changing business environment, firms must respond to changing customer need in order to remain successful. Customers expect many kinds of goods to be available with them whenever they need. When a person comes into a store with the expectation of having the desired item/article from the store and eventually walks away with or without it. If the item is either not available or in stock, there is a problem for both the retailer and the customer. The retailer loses business and the customer has to go another store/retailer for the item/article. The same situation applies to businesses buying supplies; it is costly to a business if it cannot obtain supplies when needed. To cope with this problem (i.e. stock outs) and to improve responsiveness to the customers businesses should carry inventory. But carrying inventory requires huge capital investments in constructing warehouses and insurance expenses to cover the risk of loss or damage. All of these costs are reduced if inventory can be reduced. Inventory held in retail stores or at warehouses can be reduced if replenishment is fast and reliable.

Firms that analyze their costs carefully, find that inventory and the number of warehouses can be reduced without loss of customer service by using more flexible and efficient transportation system. Such changes in a firm’s logistics set-up are sometimes referred to as a “reorganization effect”. Businesses are constantly under immense pressure to have enough stock to satisfy customers and to reduce the cost of carrying inventory as well. To accommodate these conflicting pressures, firms are left with no option but an efficient and effective logistics system enabling them reduced inventory costs while maintaining or improving the level of customer service (that is an increase in productivity). These productivity gains will not occur unless a firm’s management perceives that the logistics system is robust and reliable enough to support its plans. Logistics flexibility and its components: physical supply, purchasing, physical distribution, and demand management flexibilities are related to each other and to customer satisfaction.

Logistics, as a business competence, deals with the attainment of customer satisfaction at the minimum level of (logistic) costs. Customer satisfaction or improved customer service, is reached as the suppliers of goods and services succeed in achieving the growing needs of consumers to deliver their products according to the ever emerging demands of the customers, not only with regards to the physical nature of these products, but also with regards to their demands of reliability and flexibility of the logistics organization. A responsive and efficient logistics network helps the organization to satisfy their customers in a number of ways:

  • Increase in product availability i.e. high order fill rate and promised delivery date.
  • Reduced order cycle time.
  • Reduced distribution system malfunction i.e. accuracy of billing and product delivery.
  • Distribution system flexibility.
  • Distribution system information i.e. notice of price change, new product information, shipping delay and order status information.
  • Improved post-sale product support.