SBAA7025 - LOGISTICS MANAGEMENT

UNIT I - INTRODUCTION
Logistics - Definition, Evolution, Scope, Functions, Objectives, and Importance-Logistics Integration -
Customer Service - phases, service attributes, Value added Logistical Services-Supply Chain
Management vs Logistics.

LOGISTICS: CONCEPT, DEFINITION, ORIGIN AND EVOLUTION

Logistics management is the part of the supply chain process that plans, implements, and
controls the efficient, effective flow and storage of goods, services, and related information from
the point of origin to the point of consumption to meet customer requirements.

Logistics management may be defined as follows:

According to the Council of Logistics Management, logistics can be defined as “that part of
supply chain process that plans, implements and controls the efficient, effective flow and storage
of goods, services and related information from the point of origin to the point of consumption”.

Logistics Management is an all-inclusive term that encompasses both planning and execution of
four key aspects of logistics, i.e. transportation, distribution, warehousing and purchasing.
Another pertinent factor that logistics management takes into account is the flow of goods in
forward and reverse order.

Logistics management consists of the process of planning, implementing and controlling the
efficient flow of raw-materials, work-in-progress and finished goods and related information-
from point of origin to point of consumption; with a view to providing satisfaction to the
customer.

Origin and Evolution:

Years 30 “Military logistics”
After the Second World War, the interest of business by the logistics process arises and an
analogy is established between military logistics and technical material supply and military
logistics is begun to be related to industrial production.
Years 50 “Conceptualization of logistics”
Logistics becomes more important due to the transition that goes through the most developed
countries, from an economy characterized by excessive demand to an economy with excess
supply, with these being their main characteristics:
• First developments of the total cost of logistics operations.
• It focuses on the concern to satisfy the customer.
• Distribution channels are of particular importance. You want to sell any product
anywhere.
• Increase new products, as a result the product lines are originated.

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60 Years “Outsourcing”
Logistics took a new approach where “outsourcing” was the most appropriate mechanism to
reach customers, since it had as its main objective the subcontracting of other companies because
the flow of goods or information was efficient and reached all parts that were within the reach of
the company.
Years 70 “The concept of trial logistics”
• Customer service becomes an indispensable requirement to continue competing with
market leaders.
• Progress in the concept of physical distribution.
• There are periods of recession and growth in the world economy.
• Development of the inventory management strategy.
• The technology for the industrial revolution that occurred during these times began to
emerge, and the cost of information technology was reduced to improve the quality, which
brought about an improved mechanism for the supply of the goods Or information accurately
and precisely at the time the customer made their order, this mechanism is called “Just in
Time”, that is just in time

Since the 80’s “Modification of preferences”

• The energy crisis of the moment drives the movement towards the improvement of
transport and storage.
• Just in Time’s approach was modified by Quick Response (QR) and Efficient Consumer
Response (ECR) with the sole purpose of seeking a precise delivery with the exact amount,
when and where needed, to meet To the customer.
• Changes in supply chain preferences where special attention is paid to suppliers,
distributors and customer service, defining the end-user’s demand.
• Inventories, total logistics costs are reduced, and delivery times are shorter.
• Logistics operations are energy-intensive: environmental-ecological concern is born.

1990 “Promotion of logistics”

Logistics went on to become a more integrated process in terms of its external and internal
environment, in other words, its internal processes within the company were managed according
to the relationships that were with its customers and suppliers.
This process of integration causes logistics management to begin with a strategic plan regarding
the design of how to reach the final customers, in order to go out and minimize competition,
establishing efficient plans for the supply of the products.
• Technology continues to position itself in conventional Logistics processes and
Distribution channels
• Outsourcing services
• Demand for logistics services expands
Day by day it is observed that to put into practice a good business logistics management is
essential, it has developed over time and is now a basic aspect. A perfectly designed logistics
project is the most strategic tool to compete with the demanding current market, achieving
customer loyalty.

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Classification of Logistical Activities:
Logistics (or Logistical Activities) may be broadly classified into two categories:
I. Inbound logistics; which is concerned with the smooth and cost effective inflow of materials
and other inputs (that are needed in the manufacturing process) from suppliers to the plant. For
proper management of inbound logistics, the management has to maintain a continuous interface
with suppliers (vendors).

II. Outbound logistics (also called physical distribution management or supply chain
management); is concerned with the flow of finished goods and other related information from
the firm to the customer. For proper management of outbound logistics, the management has to
maintain a continuous interface with transport operators and channels of distribution.

Significance (or Objectives) of Logistics Management:

Logistics management is significant for the following reasons:

(i) Cost Reduction and Profit Maximization:
Logistics management results in cost reduction and profit maximization, primarily due to:
1. Improved material handling
2. Safe, speedy and economical transportation
3. Optimum number and convenient location of warehouses etc.

(ii) Efficient Flow of Manufacturing Operations:

Inbound logistics helps in the efficient flow of manufacturing operations, due to on-time delivery
of materials, proper utilization of materials and semi-finished goods in the production process
and so on.
(iii) Competitive Edge:
Logistics provide, maintain and sharpen the competitive edge of an enterprise by:
1. Increasing sales through providing better customer service
2. Arranging for rapid and reliable delivery
3. Avoiding errors in order processing; and so on.
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(iv) Effective Communication System:
An efficient information system is a must for sound logistics management. As such, logistics
management helps in developing effective communication system for continuous interface with
suppliers and rapid response to customer enquiries.
(v) Sound Inventory Management:
Sound inventory management is a by-product of logistics management. A major headache of
production management, financial management etc. is how to ensure sound inventory
management; which headache is cured by logistics management.

FUNCTIONS OF LOGISTICS:
Logistics is a process of movement of goods across the supply chain of a company. However,
this process consists of various functions that have to be properly managed to bring effectiveness
and efficiency to the supply chain of the organization.

(i) Order Processing: Customers’ orders are very important in logistics management. Order
processing includes activities for receiving, handling, filing, recording of orders. Herein,
management has to ensure that order processing is accurate, reliable and fast. Further,
management has to minimize the time between receipt of orders and date of dispatch of the
consignment to ensure speedy processing of the order. Delays in execution of orders can become
serious grounds for customer dissatisfaction; which must be avoided at all costs.
(ii) Inventory Management: The basic objective of inventory management is to minimize the
amount of working capital blocked in inventories; and at the same time to provide a continuous
flow of materials to match production requirements; and to provide timely supplies of goods to
meet customers’ demands.
(iii) Warehousing: Warehousing is the storing of finished goods until they are sold. It plays a
vital role in logistics operations of a firm. The effectiveness of an organization’s marketing
depends on the appropriate decision on warehousing. In today’s context, warehousing is treated
as switching facility rather than a storage of improper warehousing management. Warehousing is
the key decision area in logistics. The major decisions in warehousing are:

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 • Location of warehousing facilities
• Number of warehouses
• Size of the warehouse
• Warehouse layout
• Design of the building
• Ownership of the warehouse

(iv) Transportation: For movement of goods from the supplier to the buyer, transportation is
the most fundamental and important component of logistics. When an order is placed, the
transaction is not completed till the goods are physically moved to the customer’s place. The
physical movement of goods is through various transportation modes. In logistics costs, its share
varies from 65 to 70 percent in the case of mass-consumed, very low unit-priced products. Firms
choose the mode of transportation depending on the infrastructure of transportation in the
country or region. Cost is the most important consideration in the selection of a particular mode
of transport. However, sometimes urgency of the good at the customer end overrides the cost
consideration, and goods are sent through the fastest mode, which is an expensive alternative.
(v) Material Handling and storage system: The speed of the inventory movement across the
supply chain depends on the material handling methods. An improper method of material
handling will add to the product damages and delays in deliveries and incidental overheads.
Mechanization and automation in material handling enhance the logistics system productivity.
Other considerations for selection of a material handling system are the volumes to be handled,
the speed required for material movement and the level of service to be offered to the customer.
The storage system is important for maximum space utilization (floor and cubic) in the given
size of a warehouse. The material handling system should support the storage system for speedy
movement (storage and retrieval) of goods in and out of the warehouse.
(vi) Logistical Packaging: Logistical or industrial packaging is a critical element in the physical
distribution of a product, which influences the efficiency of the logistical system. It differs from
product packaging, which is based on marketing objectives. However, logistical packaging plays
an important role in damage protection, case in material handling and storage space economy.
The utilization of load has a major bearing on logistical packaging with regard to the packaging
cost.
(vii) Information: Logistics is basically an information-based activity of inventory movement
across a supply chain. Hence, an information system plays a vital role in delivering a superior
service to the customers. Use of IT tools for information identification, access, storage, analysis,
retrieval and decision support which is vital among the functions of logistics is helping business
firms to enhance their competitiveness.

INTEGRATED LOGISTICS MANAGEMENT

The movement of raw materials and components to a manufacturing company must be managed.
So must the movement of finished goods from the manufacturing plant to further processing, to
the retail, or to the final consumer. The management of this movement is called integrated
logistics management.

Integrated Logistics is defined as, “the process of anticipating customer needs and wants;
acquiring the capital, materials, people, technologies and information necessary to meet those

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needs and wants optimizing the goods-or-service-producing a network to fulfill customer
requests; and utilizing the network to fulfill customer request in a timely way.”
Integrated logistics is a service-oriented process. It incorporates actions that help move the
product from the raw material source to the final customer.

Variables affecting the Evaluation and Growth of Integrated Logistic:

• The first was the growth of the consumer awareness and the marketing concept. Product
line expanded to meet the rising demand for more selections. This product line expansion
put great presser on distribution channels to move more products and keep cost down,
especially in transportation and inventory.

• A second factor was the introduction of the computer. Computer experts and integrated
logistic manager quickly found a multitude of computer application for logistic. This
application offered still greater efficiency in transportation routing and scheduling,
inventory control, warehouse layout and design, and every aspect of integrated logistic.
In fact computers allowed integrated logistic managed to modal integrated logistic system
and then analyze the effect of proposed change. This application greatly advance the
system’s approach

• The third variable leading to the growth of integrated logistics was the world wide
economy in the 1970s and 1980s. Global recession and rising interest rates caused many
firms to refocus attention on reducing cost advantage; many firms were forced to
revaluate overall transportation needs. Also, rising interest rates turned attention to
maintaining minimum inventory levels because of the cost of capital

• Globalization of business and the development of world trade blocks are a fourth factor
influencing the growth of integrated logistics. Integrated logistic can provide firms with a
cost advantage. Furthermore, trading blocks in Europe. Southeast Asia, Asia, Africa and
the Americans (European Union, association of Southeast Asian nations and the Asian-
pacific economic cooperation, southern African development community, North
American free trade agreement and now the free trade agreement of the Americas)
require integrated logistics to tie the participating countries into single marketplaces.

• The final factor affecting integrated logistics is the growth of just-in-time manufacturing
(JIT), supply management, transportation, and electronic data interchange (EDI) in the
1980s and 1990s. As manufacturers adopted total quality management (TQM), JIT, and
EDI, integrated logistics management has come to the forefront. Effective TQM and
JIT require optimizing the inbound and outbound transportation and more
efficient inventory management.

Activities related to integrated logistics:

• Physical distribution.
• Materials management.
• Logistics engineering.
• Business logistics.
• Logistics management.

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 • Integrated logistics management.
• Distribution management.
• Supply chain management.
Although the activities include under each term vary, they share one key ingredient: “The
concept of a continuous uninterrupted flow of the product.”

Phase in Customer Service:

Customer service is the measure of how logistics is creating the time and place utility for a
product. The meaning of customer service varies with the organization the product, it is
marketing and the transaction phase it is undergoing the buyer looks for value for the money
spent. While the seller, in delivering superior customer service, looks for the trade-off between
cost and customer satisfaction.
Hence, customer service depends on the phase of the transaction it is passing through. There are
three phases associated with the exchange process. The degree of importance of each phase
varies with the organization and depends on the product and customer requirements.

Pre-transaction phase:
This phase pre-transaction which is more related to policy for defining the service level and
related activities in qualitative and quantitative terms. It is a non-routine activity. It gives the
guidelines to the operating people regarding the dimensions and limitations of customer service
activities of the firm.
The pre-transaction phase is a creation of the service platform to serve the customer, so as to
build credibility in the market and rate a good image among the existing and prospective
customers. This is an important phase of the exchange process, which will help to mold the
organization toward customer orientation and in turn influence the perception of the firm in the
mind of the customer.
Typically, the following are important elements of the pre-transaction phase.

• Customer service policy: This will indicate the service standards of the firm. Further,
they commit to offer free supply, in a case of the parts reach their destination after the
stipulated delivery period. In this phase, the firm will have to evolve a policy framework

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 for performance measures, evaluation methods, reporting structure, and the reward
structure.

• Organization building: For implementing the policy directives on customer service, the
firm should formalize the porting structure, delegate authority, and allocate
responsibility. The contact person’s name and contact number need to be communicated
to the customers for information on order status, dispatch details, warranty claims, and so
forth. A proper reward system will motivate the employee involved in customer service
to effectively and efficiently interface with the customer.

• Structuring the service: The basic structure of the service depends on customer
expectations, industry standard, and the service standard the firm would like to keep. The
firm marketing capital goods may evolve a service structure to extend lifetime product
service commitments for the supply of spares, irrespective of continuous product and
technology upgrades at its end. The supplier may extend a free periodic product check-up
service to clients to gain a competitive edge. In such case, he/she may absorb all service-
related costs as a value-added free service to the client. In the maturity stage of the
product lifecycle, when competition is fierce the firm needs to customize the service to
strategic clients or to a section of clients in the niche segments.

• Customer education: This is required for minimizing customer complaints on product

deliveries, product operations and maintenance, spare parts inventory requirements, and
maintenance, freight charges, transit damages, and more. Customer education is done
through manuals, training, seminars, and workshops.

• System design: System configuration should take care of active customer service to
answer all possible queries in the customer’s mind before placing an order. The system
may be manual or fully automatic as in e-commerce. However, a prerequisite of the
system in a competitive environment is responsiveness to customer requirements and the
flexibility to take care of unplanned events with knowledge of pre-transaction phase is
nothing but inevitable if you want to build a strong customer service.

Transaction phase:
Customer service during the transaction phase is associated with routine tasks performed in the
logistics supply chain. These tasks need coordination for the entire system to be efficient and
effective in delivering service to the customer per the desired standard.
The following are the various service elements associated with the transaction phase:
• Order fulfillment reliability: In the transaction phase, the most important factor is the
reliability to fulfill the order within the agreed time frame and also with respect to the
quantity and quality of the material ordered. This depends on the close coordination and
management of the various components of the order cycle such as order processing,
material planning allocation, picking, packing, and transportation. The customer’s
production schedule is very much dependent on the reliability factor of order fulfillment
by the supplier.
• Delivery consistency: The other important factor in the transaction phase is the
consistency of delivery of repeat orders. Let’s say out of 100 deliveries only 60 are on

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 time while 40 deliveries deviate from the agreed schedule. Now, this likely to cause
production interruptions at the customer’s end, and the customer will surely be
dissatisfied with such inconsistencies. The inconsistency of delivery may be because of
problems with the various elements of order fulfillment that need system improvement as
well as for better supply chain management.
• Order convenience: Order convenience is the ease with which the customer can place an
order. The barriers to convenience are the paperwork required by the supplier,
compliance to various procedures complex payment terms poor communication network
at the supplier’s end, and poor coordination in the marketing network of the supplier. In
competitive markets, these barriers may lead to opportunity loss and warning of the
customer base.
• Order postponement: The customer, for some reason, may require an entire order or a
part thereof to be postponed or executed in parts, in a phased manner. This may be due to
the rescheduling of requirements at the customer’s end. In another case, due to the
availability of a certain product category in the future, the seller may ask the buyer to
place the order now and ship the product when it is available on future dates.
• Product substitute: A situation may arise that the product ordered can’t be shipped due
to certain manufacturing or quality problem. The seller may extend the service by
offering a substitute product of similar or better quality in different sizes or from the
available brands in the market (on the same terms and conditions) in order to keep the
relationship and retain the customer during transaction phase. For obtaining the
customer’s consent for a product substitute, the seller needs closer interaction and clear
communication with the customer. So all of these are very important in customer service.

Post-Transaction phase:
This phase releases primarily to customer satisfaction and building a long-term relationship with
the customer. It involves the commitment of resources to offer the desired level of service. For
service-based products, a post-transaction phase is an important phase dependent, on the quality,
which may make the image of a company in the minds of their customers.
• Order status information: In e-commerce business-to-business transactions, the
customer, after payment of part value (sometimes full value) of the product as an
advance, requires continues feedback on the status of the shipment.
• Customer complaints, claims, and returns: The seller’s responsibility is not over after
a product is dispatched to the client. The customer may have received products that were
damaged during transit, or the product may not perform as per the functional
requirement, or the client may have gotten the wrong consignment. For resolving these
issues, the manufacturer normally evolves a product return policy and implements it
through the reverse logistics system.
• Product installation, commissioning and technical snags: Technically complex
products need installation, commissioning and stabilization services from suppliers, or
else the product might develop technical snags during the warranty period. To handle
these issues, firms normally have a separate set-up for after sales service. The after sales
department takes care of all documentation customer technical complaints, product
installation, commissioning stabilization and handing over.
• Customer education and training: Customer education and training is an important
service element in the post-transaction phase. In the case of technically complex

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 products, it is necessary for the seller to train or educate the user in their operation to get
the desired functional output in supply chain management. This may be done through
product manuals, training workshops, or demonstrations to improve customer service.

Customer service attributes (Distribution aspects):

The most important and critical aspect of customer service in supply chain management is
physical distribution of the product, that is, making the right product available at the right place
and the right time, followed by the motivation of service success facilitators such as channel
members to complete the physical distribution. This is a vital point for supply chain
management.
Order processing time: Order process time is the most important measure of customer service
in physical distribution. It is the time between the placement of an order by the buyer and the
supply of the material by the seller against and order. This involves the supply of all the material
against the order placed within the agreed time frame, without any error either in documentation
or physical supply. This customer service attributes helps in building a long term buyer-seller
relationship.
The order processing time consists of the time required for registration of the order in the
supplier’s system after through technical and commercial scrutiny, material allocation and
pickup from the work in progress inventory, warehouse or distribution centers; packing of
material; documentation; and dispatch of material. The time consumed in each of these activities
will depend on how well coordinated the various departments are and the speed of the
information flow across the logistics supply chain.
Delivery consistency: This refers to the consistency in maintaining the same delivery period for
delivering the material to the buyer over a period of time. For example, if the supplier dispatches
the material per the agree delivery time for 97 orders against 100 repeat orders received during
the year t may be said that the supplier’s delivery consistency is 97 percent, and per the present
industry norms it is an excellent delivery performance.
Delivery consistency speaks of the degree of coordination in the various logistics arms of the
seller’s firm and the efficiency and effectiveness of the logistical supply chain. The delivery
consistency of suppliers has a direct effect on the inventory level at the buyer’s end.
Inconsistency in deliveries may force the buyer to carry an excess inventory of raw materials and
components as a precautionary measure and thereby block more funds. Subsequently, the buyer
may look for an efficient source of supply to get rid of the inventory problem. The delivery
consistency of suppliers has a direct effect on the inventory level at the buyer’s end.
Inconsistency in deliveries may force the buyer to carry an excess inventory of raw materials and

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components as a precautionary measure and thereby block more funds. Subsequently, the buyer
may look for an efficient source of supply to get rid of the inventory problem.
Delivery frequency: The frequency of delivery is the key element in customer service. The
customer does not want to carry an excess inventory but wants his operations to run without
interruptions. As a result, the customer prefers frequent deliveries in small lots. This may
increase transportation cost, but it reduces the inventory related cost drastically with the net
result being a reduction in the overall supply chain cost.

Stock availability: Stock availability is an important measure of customer service. With excess
stocks, the supplier may extend an excellent service to the customer, but inventory related cost
reduces the profit margin of business operations. Hence the firm needs to strike a balance
between the inventory level and the desired customer service level through integrated logistics
operations.

VALUE ADDED SERVICE IN LOGISTICS – CONCEPT:

Value-added logistics (VAL) is a term used within the sector. This allows for a more
comprehensive service and is an essential tool for increasing customer satisfaction. This is
especially important when it comes to certain operations based on the trust that a customer places
in a company. It is the creation of a higher added value in the logistics chain. Every transport
company can move products from A to B, but it is difficult to stand out with that in a market full
of competition. Carriers therefore provide an increasing number of services: not only do they
organize transport; they also pack, weigh and label the products.

Value added – role of logistics:

• Form Utility: It refers to the value added to goods through a manufacturing, production
or assembling process. For example, form utility results when raw materials are
combined in some predetermined manner to make a finished product. The simple process
of adding the raw materials together to produce the soft drink represents a change in
product form that adds value to the product.
• Place Utility: Logistics provides place utility by moving goods from production surplus
points to points where demand exists. Logistics extends the physical boundaries of the
market area, thus adding economic value to the goods. This addition to the economic
value of goods and services known as place utility.
• Time Utility: Not only must goods or services be available whenever consumers need
them, but they must also be at that point when customers demand them. This is called
time utility or the economic value added to a good or service by having it at a demand
point at a specific time. Logistics creates time utility through proper inventory
maintenance and the strategic location of goods and services. For example, logistics
creates time utility by having heavily advertised products and sales merchandise available
in retain stores at precisely the time promised in the advertising effort.
• Possession Utility: It is primarily created through the basic marketing activities related
to the promotion of products or services. We may define promotion as the effort, through
direct and indirect contact with the customer, to increase the desire to possess a good or
to benefit from a service. The role of logistics in the economy depends upon the existence
of possession utility, for time or place utility make sense only if demand for the product
or service exists.

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Value added – functions:

Efficient logistics contributes to added-value in four major interrelated ways:

• Production costs: Derived from the improved efficiency of manufacturing with
appropriate shipment size, packaging and inventory levels. Thus, logistics contributes to
the reduction of production costs by streamlining the supply chain.
• Location: Logistics adds value by taking better advantage of various locations, implying
access to expanded markets (more customers) and lower distribution costs.
• Time: Added value derived from having goods and services available when required
along the supply chain (e.g. lower lead times) with better inventory and transportation
management.
• Control: Added value derived from controlling most, if not all, the stages along the
supply chain, from production to distribution. By better synchronizing cycles and lead
times, logistics enables better marketing and demand response, thus anticipating flows
and allocating distribution resources accordingly.

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