UNIT 2 - LOGISTIC ACTIVITIES

Marketing and Logistics - Relationship of logistics to Marketing and Production, Logistics and
Modern Organization - Elements of Logistics - Trade-off Analysis - Types of Trade-off Analysis
- Logistics Outsourcing - Third party logistics, Fourth party Logistics.

MARKETING AND LOGISTICS – CONCEPT:

The importance of a logistics system lies in the fact that it leads to ultimate consummation of the
sales contract. Delivery according to the contract is essential to fulfilling the commercial and
legal requirements. In the event of failure to comply with the stipulated supply of period, the
seller may not only get his sale amount back, but may also be legally penalized, if the sales
contract so specifies. There is no doubt that better delivery schedule is a good promotional
strategy when buyers are reluctant to invest in warehousing and keeping higher level of
inventories. Similarly, better and timely delivery helps in getting repeat orders through creation
of goodwill for the supplier. Thus, as effective logistics system contributes immensely to the
achievements of the business and marketing objectives of a firm. It creates time and place
utilities in the products and thereby helps in maximizing the value satisfaction to consumers. By
ensuring quick deliveries in minimum time and cost, it relieves the customers of holding excess
inventories. It also brings down the cost of carrying inventory, material handling, transportation
and other related activities of distribution. In nutshell, an efficient system of physical distribution
logistics has a great potential for improving customer service and reducing costs.

Logistics has gained importance due to the following trends

• Rise in transportation cost.
• Production efficiency is reaching a peak
• Fundamental change in inventory philosophy
• Product line proliferated
• Computer technology
• Increased public concern of products growth of several new, large retail chains
• Reduction in economic regulation
• Growing power of retailers
• Globalization

As a result of these developments, the decision maker has a number of choices to work out the
most ideal marketing logistics system. Logistics is also important on the global scale. Efficient
logistics systems throughout the world economy are a basis for trade and a high standard of
living for all of us. Lands, as well as the people who occupy them, are not equally productive.
That is, one region often has an advantage over all others in some production specialty. An
efficient logistics system allows a geographical region to exploit its inherent advantage by
specializing its productive efforts in those products in which it has been an advantage by
specializing its productive to other regions. The system allows the products landed cost
(production plus logistics cost) and quality to be competitive with those form any other region.
Common examples of this specialization have been Japan’s electronics industry, the agricultural,
computer and aircrafts industries of United States and various countries dominance in supplying
raw materials such as oil, gold, bauxite, and chromium.

OBJECTIVES OF MARKETING LOGISTICS:

The General objectives of the logistics can be summarized as:
1. Cost reduction
2. Capital reduction
3. 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.

SCOPE OF THE MARKETING LOGISTICS:

The development of interest in logistics after industrial revolution and World War II contributed
to the growth in scope of logistical activities. The following areas are the major scope of
logistics:
• Demand forecasting
• Distribution communication
• Inventory Control
• Material Handling
• Order Processing
• Part & Service Support
• Plant and Warehouse side selection
 • Procurement
• Packaging
• Salvage & scrap disposal
• Traffic & transportation
• Warehousing & Storage
• Time & Place Utility
• Efficient Movement to Customer
• Return goods handling
• Customers Service

LOGISTICS AND MARKETING INTERFACE:

Integration of different processes and logistic functions in the framework of logistic system
and logistics management, as well as integration of this system with marketing system in scale
of a company and market is reflected in an integrated concept of logistic-marketing
management, constituting fundamental aspect of modern company management.

MARKETING LOGISTICS

support of market research support of company’s

products promotion

Choice of places and

Information ways of promotion
gathering
MARKETING
Preparing of proper
environmental conditions
Information of promotion
processing Delivery of goods and
materials to
promotion
Ensuring promotional staff and
Conceptual preparing proper conditions of its work and
of logistic tasks
life
CLIENT Realization of proper
potential customer’s service
Planning of logistic level
marketing tasks

Elimination exhibitions

Realization of assessment exhibitions

of logistic marketing tasks Deployment of goods
and materials promotion
 Logistic-marketing management constitutes linkage and integration of two concepts, on one
side - logistics as a management concept oriented on flows, and marketing as a concept
oriented on company management, on the other. Both mentioned management concepts meet
on very fragile ground which is market, determining a strategy of company’s acting on
delivery and distribution market. Present logistics and marketing are treated as dual concepts
of integrated company management. Logistics and marketing are defined as main orientations
(criteria) of management in a company and interpreted in the real sense as significant
(equivalent) spheres of functional and integrated processes in company. Preparing a strategy
of a company, special attention should be paid to the relation between logistic and marketing
strategies. If marketing is identified with strategic management, then logistics is a part of it. In
a modern company marketing must be logistic, logistics must be marketing, Kotler (1998).

In the modern concept of logistic-marketing management on one side, customer satisfaction is

achieved by coordinated marketing activities concerning product, price, promotion and
distribution by offering to customer by logistics time and place usefulness. On the other side,
achieving by company an acceptable level of profit in long time is determined by reduction of
global logistic costs. An effect of strategic logistic activity is a group of values and benefits
achieved by customer. It is described as “7P” formula of logistic activity: proper product,
proper information, proper amount, proper quality, proper time, proper place, and proper cost
of order.

RELATIONSHIP OF LOGISTICS TO MARKETING AND PRODUCTION:

Organizations are recognizing the importance of integrating their marketing and logistics
activities. According to recent trade publications, "whatever the definition, warehousing and
distribution are critical to the successful marketing of products: if the product is not where
customers want it, when they want it, it is unlikely to sell."

Also, the quality of incoming materials and parts obtained through purchasing often determines
the quality of finished goods for sales and distribution. Thus, purchasing is tied to production,
marketing, and logistics. In particular, logistics is closely linked to marketing through their roles
in customer services. Production logistics aims to ensure that each machine and workstation
receives the right product in the right quantity and quality at the right time. The concern is
with production, testing, transportation, storage, and supply. Production logistics provides the
means to achieve customer response and capital efficiency.

The relationship between marketing and logistics management:

logistics affects the market marketing, marketing facilitator logistics, in order to
achieve marketing, meet customer demand, improve effectively, make the product value to
maintain customer loyalty and so on all need to be adjusted, logistics and marketing. The
objectives of these factors are too; Simplify the task of generating and processing technical data
through; Better packaging, eliminating redundancies, reducing processing time, and accessible
of information to all organizations.

ELEMENTS OF LOGISTICS
The role of each element of logistics often defines the logistics activities within a supply
chain.
The problem with definitions and discussions of supply chains is that it is not easy to recognize
the role of logistics within them, which is why the supply chain river is a simple way to relate
the role of logistics within a supply chain. The elements of logistics further help to explain what
logistics activities and processes are being undertaken in a supply chain.

There are five elements of logistics:

• Storage, warehousing and materials handling
• Packaging and unitization
• Inventory
• Transport
• Information and control

Let’s break this down:

• What is the role of storage, material handling and warehouses in logistics?
It is to enable a steady stream of products to be supplied by manufacturers. Why is this
important? Manufacturers need to operate at peak efficiency, but consumers tend not to demand
goods at the same rate as a manufacturer supplies them. There tends to be an imbalance between
supply, which is steady, and demand, which can be unpredictable. The answer is to store the
surplus goods produced by a manufacturer until they are demanded by consumers. To achieve
this, warehouse buildings are required. These need specialist storage equipment such as shelving
or racks and material handling equipment to move them around the warehouse and to load and
unload delivery vehicles.

• What is the role of packaging and unitization?

A key definition and one of the Rs of logistics is the care and condition of a product. Packaging
is an essential part of that. Unitisation is also important as this assists storage and transportation.
The easiest product to move and store is a cube, so packaging and unitization attempts to take all
different sizes and shapes of product and pack them as near as possible into a cuboids shape.

• What is the role of inventory?

Inventory is a logistics element that is closely related to storage and warehousing. It is concerned
with what stock to hold, where the stock is located and how much stock to hold. In effect,
inventory is controlling the flows of goods going into and out of a warehouse. How is this
achieved? By looking at sales data of past orders and using various mathematical and statistical
tools to attempt to predict how much goods will be demanded by consumers. Inventory
management is not an exact science, but depending on how variable demand can be, it is a useful
tool to help manage the flows of goods through the supply chain.
 • What is the role of transport?
A major element of logistics that most will recognize is transport. This includes all modes of
transport including road vehicles, freight trains, cargo shipping and air transport. Without
transport, goods would be unable to move from one stage to another within a supply chain.
Some goods with short supply chains, such as foods, do not travel far. Other more complex
products consist of many components that can be transported from all over the world.

• What is the role of information and control?

The element of information and control is needed by all the elements to act as triggers to various
operational procedures. We have mentioned the information needed for inventory. Order levels
help decide what orders need to be picked and packed in warehouses and enable the planning
and organisation of transport. Information and control’s role is to help design information
systems that can control operational procedures. They are also key in the forecasting of demand
and inventory as already mentioned.

TRADE-OFF ANALYSIS – CONCEPT

The trade-off is a situation that involves losing one quality, aspect or amount of something in
return for gaining another quality, aspect or amount. A trade-off (or tradeoff) is a situational
decision that involves diminishing or losing one quality, quantity or property of a set or design in
return for gains in other aspects. In simple terms, a tradeoff is where one thing increases and
another must decrease. The definition of trade off is an exchange where you give up one thing
in order to get something else that you also desire.

Trade-off analysis is a family of methods by which respondents' utilities for various product
features (usually including price) are measured. In some cases, the utilities are measured
indirectly. In this case, respondents are asked to consider alternatives and state a likelihood of
purchase or preference for each alternative. As the respondent continues to make choices, a
pattern begins to emerge which, through complex multiple regression (and other) techniques,
can be broken down and analyzed as to the individual features that contribute most to the
purchase likelihood or preference.

The importance or influence contributed by the component parts. i.e., product features, are
measured in relative units called "utils" or "utility weights."In other cases, respondents are asked
to tell the interviewer directly how important various product features are to them. For example,
they might be asked to rate on a scale of 1 to 100 various product features, where 1 means not at
all important to their purchase decision and 100 means extremely important to their purchase
decision. Trade-off analyses produce several types of information. First, they tell us what
features (and levels of features) are most valued by customers. Second, they allow us to model
how likely people will be to purchase various configurations of products, the share of revenue
these products will most likely receive and what role price plays in the assessment of
acceptability.

THE FOUR MAIN TYPES OF TRADE-OFF ANALYSIS:

I. Conjoint
Conjoint analysis is the original trade-off approach and uses linear models. There is metric
conjoint, where respondents monadically rate various product configurations, and non-metric
conjoint, where respondents rank a set of product configurations. There are also full-profile
conjoint, partial-profile conjoint and pairwise conjoint. Full-profile conjoint uses all product
features in every product configuration. Partial profile conjoint uses a smaller subset of available
product features in the product configurations. Pairwise conjoint requires the respondent to rate
their preference for one product over another in a paired comparison. Conjoint models are
simply regression models which are constructed for each individual respondent. Typically, each
respondent rates or ranks 20 to 30 product configurations. Each product configuration contains
different levels of the product attributes being tested. If the product levels are varied
appropriately (the role of experimental design), a regression model can be estimated for each
individual, using the product ratings as cases. The coefficients from the model are the utilities or
utils.

A conjoint approach should be used if a limited number of attributes needs to be tested and
utilities need to be estimated for individual respondents, e.g., conjoint-based segmentation.

II. Discrete Choice

Discrete choice differs from conjoint in that respondents are shown a set of products from which
they pick the one they most want to buy or none if they are not interested in any of the choices
shown (rather than rate or rank choices). Respondents are shown several sets of choices
sequentially. For each choice set, they are asked to pick one or none. This is in contrast to most
forms of conjoint where respondents are not allowed to choose none of the product options
(MACRO incorporates no-buy choices into its conjoint models). The discrete choice procedure
has the advantage of being more like the actual purchase decision process than do any of the data
collection methods used in most conjoint studies.

Also, in conjoint methods, the mathematical models constructed to simulate market behavior are
based on linear regression models. In discrete choice, the basis is the multinomial logit model,
which is non-linear. Another analytical difference is that, in conjoint procedures, the utility
weights are estimated for each respondent individually. These weights can often provide the
basis for very powerful customer segmentation. Most commercially available forms of discrete
choice do not allow this option, although this may be rapidly changing.

Further, because discrete choice models are generally estimated at the aggregate level, there
exists the possibility that respondents will have strong but opposite preferences to one another.
These preferences will effectively cancel each other out when the model is constructed at the
aggregate level, yielding the incorrect conclusion that respondents had no strong preference.
This is sometimes referred to as the heterogeneity problem.

There are two basic forms of discrete choice: classic and exploding data.
Classic discrete choice involves showing a respondent a series of sets of products (as described
above). In exploding data discrete choice, respondents are asked to rank order a set of products
based on purchase interest (similar to non-metric conjoint). This rank-ordered data set can be
transformed into a format suitable for logit model estimation. Exploding data discrete choice has
the advantage of more efficient data collection over classic discrete choice. The exploding data
approach creates many times more data points (or cases) than the classic approach with the same
interview length.
Discrete choice should be used if the primary objective of the study is to estimate market share
or price sensitivity, a limited number of attributes need to be tested and the sample population is
known to be homogeneous with respect to all product attributes.

III. Self-Explicated
Conjoint and discrete choice both determines respondent’s utilities indirectly.
Self-explicated determines respondents’ utilities directly. With self-explicated scales,
respondents are asked directly how important all levels of all attributes are to their purchase
interest. Despite its conceptual simplicity, self-explicated models have been shown to be
comparable to conjoint models. Self-explicated conjoint analysis requires respondents to reveal
their utilities directly. Accordingly, standard questionnaire methods can be used to collect the
information.

The technique involves the following steps:

• Respondent are informed about all the attributes and their levels, and the respondents are
then asked to identify attribute levels that are totally unacceptable to them
• From among the acceptable levels of the attributes, respondents are asked to indicate
which are the most preferred and least preferred levels of each attribute
• Using the respondents’ most important attribute as an anchor, elicit importance ratings
for the other attributes (on a 0 – 100 scale)
• For each attribute, rate the desirability of the different acceptable levels with the attribute
• Utilities for acceptable attribute levels are obtained by multiplying the importance rating
and the desirability ratings
The utilities are then entered into a choice simulator program, and choice information similar to
other conjoint programs can be obtained.
Self-explicated approaches are useful when there are a large number of attributes and the
decision process being modeled is cognitive.

IV. Hybrid
Hybrid models are models that use a combination of the above techniques. The most famous
hybrid model is ACA, Adaptive Conjoint Analysis.

Adaptive Conjoint Analysis

In this procedure, a computer program prompts the interviewer with questions. The procedure is
as follows:
Respondents are first walked through a battery of feature-importance ratings and rankings;
second, through a series of pairwise trade-offs of different product configurations. The product
configurations shown to any one respondent may not include all of the attributes being tested.

The configurations to be paired are based on the answers to the importance questions and
rankings asked in the beginning of the interview. Items that are considered of little importance
show up in the comparisons less often. Items that are considered of greater importance show up
in the comparisons more often.

For each pair of products being tested, the respondent is to indicate which product they prefer
and the degree to which they prefer it.
The software continues prompting with pairwise comparisons of product configurations until
enough data has been collected to estimate conjoint utilities for each level of each feature. Since
the procedure is adaptive, only fractions of the total number of possible product combinations
are tested. ACA is an approach that is appropriate for building preference models of cognitive
behavior with large numbers of attributes. It may not be as useful when price sensitivity, non-
cognitive purchase decisions or interaction terms are to be modeled.

LOGISTICS OUTSOURCING:
Outsourcing is the business practice of hiring a party outside a company to perform services and
create goods that traditionally were performed in-house by the company's own employees and
staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.
 • 1PL - First-Party Logistics
An enterprise that sends goods or products from one location to another is a 1PL. For example, a
local farm that transports eggs directly to a grocery store for sale is a 1PL.
• 2PL - Second-Party Logistics
An enterprise that owns assets such as vehicles or planes to transport products from one location
to another is a 2PL. That same local farm might hire a 2PL to transport their eggs from the farm
to the grocery store.
• 3PL - Third-Party Logistics
In a 3PL model, an enterprise maintains management oversight, but outsources operations of
transportation and logistics to a provider who may subcontract out some or all of the execution.
Additional services may be performed such as crating, boxing and packaging to add value to the
supply chain. In our farm-to-grocery store example, a 3PL may be responsible for packing the
eggs in cartons in addition to moving the eggs from the farm to the grocery store.
• 4PL - Fourth-Party Logistics
In a 4PL model, an enterprise outsources management of logistics activities as well as the
execution across the supply chain. The 4PL provider typically offers more strategic insight and
management over the enterprise's supply chain. A manufacturer will use a 4PL to essentially
outsource its entire logistics operations. In this case, the 4PL may manage the communication
with the farmer to produce more eggs as the grocery store's inventory decreases.
• 5PL - Fifth-Party Logistics
A 5PL provider supplies innovative logistics solutions and develops an optimum supply chain
network. 5PL providers seek to gain efficiencies and increased value from the beginning of the
supply chain to the end through the use of technology like blockchain, robotics, automation,
Bluetooth beacons and Radio Frequency Identification (RFID) devices.

Through the spectrum of logistics models from 1PL to 5PL, it's clear that more and more
of the logistics function are in the hands of the provider rather than the enterprise itself. The
most common models now are 3PL and 4PL and each one can help to solve supply chain
challenges.
What is a Third-Party Logistics Provider?
The term "third-party logistics provider," or 3PL, has been around since the 1970s. It simply
means that a third party is involved in a company's logistics operations, in addition to the
shipper/receiver and the carrier.

A 3PL does not take ownership of (or title to) the products being shipped. This third party comes
into play as an intermediary or manager between the other two parties. The first 3PLs were
intermodal marketing companies that accepted loads from shippers and tendered them to
railroads, becoming a third party in the contract between shippers and carriers, according to
the Council of Supply Chain Management Professionals (CSCMP) glossary. Today, any
company that offers some form of logistics services for hire is known as a 3PL. This includes
facilitating the movement of parts and materials from suppliers to manufacturers, as well as
finished products from manufacturers to distributors and retailers.

A 3PL may or may not have its own assets, such as trucks and warehouses. In some cases, the
role of 3PL and broker overlap, but typically a broker is used to engage trucking capacity for a
specific shipment. A 3PL may act as a broker or use brokers to move clients' freight.
Most 3PLs offer a bundle of integrated supply chain services, including:
• Transportation
• Warehousing
• Cross-docking
• Inventory management
• Packaging
• Freight forwarding

A 3PL can scale and customize services to meet customers' needs based on their strategic
requirements to move, store, and fulfill products and materials. Companies turn to 3PLs when
their supply chain becomes too complex to manage internally. For example, a company may
grow through mergers and acquisitions, so a supply chain that was manageable at one time
outgrows the in-house capability.

What is a Fourth-Party Logistics Provider?

A fourth-party logistics provider, or 4PL, represents a higher level of supply chain management
for the customer. The 4PL gives its clients a “control tower” view of their supply chains,
overseeing the mix of warehouses, shipping companies, freight forwarders and agents. The goal
is to have the 4PL act as the single interface between all aspects of the supply chain and the
client organization.
In some cases, a 4PL may be established as a joint venture or long-term contract between a
primary client and multiple partners, often to manage logistics for specific locations or lines of
business. The structure of a 4PL can vary, as there may be a 4PL component within a larger 3PL
relationship. A 4PL is a form of business process outsourcing, similar to contracting out human
resources or financial functions.

The Advantages and Drawbacks of Logistics Outsourcing:

The rise of on-demand delivery has forced modern-day businesses to rethink their traditional
logistic operation models. Outsourcing the entire function to a trustworthy 3PL partner has
become a viable option since it reduces the complexity of achieving deliveries until the last mile.
The benefits of logistics outsourcing come in several forms – savings in operating costs, savings
in human capital, streamlined operations, no lock-in of working capital and well-connected
global delivery endpoints to name a few.
Let’s take a closer look at some of the additional advantages:
1. Reduces burden of back-office management
On the surface, the logistic function appears to be simple: sending physical packages from point
A to point B. However, before each consignment is sent out on transit, there is paperwork,
auditing and verification to be conducted and documented. 3PL outsourcing service providers
will have the necessary backend personnel and systems in place to take care of these procedures.
From assigning a dispatch note and carrying out physical verification, to ensuring that all
shipping papers are in order, logistics outsourcing can take care of the routine activities, sparing
time for the business to focus on other priorities.

2. Economies of scale
3PL players usually have a globally distributed network of carriers and fleets which allow them
to reach any destination with ease. Since the function is outsourced, it is easy to scale up or scale
down the logistic reach of the business without having to set up owned infrastructure and
personnel.

3. Real-time visibility of inventory

Professional logistic outsourcing service providers use ERP systems or cloud-based Warehouse
Management Systems to help track inventory on a real-time basis. This data can also be received
from the service provider on a regular basis for supply chain management planning.

4. Expert documentation handling

Logistics, especially cross-border logistics, requires adherence to sophisticated paperwork. For a
business that has logistics only as a small function or department, this can be a tedious job to do
on a routine basis. Logistics outsourcing service providers have the domain expertise and
knowledge to take care of all kinds of paperwork involved like inter-connected carrier contracts,
insurance certificates, bill of lading, certificate of origin, etc.

Five Often Overlooked Pitfalls in Logistic Outsourcing:

While logistic outsourcing delivers high on economic benefits, it also riddled with pitfalls that
businesses must safeguard against.

1. Outsourcing without proper appraisal process:

A good logistics partner is hard to find. The appraisal process itself will include gathering quotes
and doing quality reports to check if the provider meets benchmark standards and so on. Rushing
through the tender process without adhering to a well-thought process will lead to hassles in the
future.

2. Choosing a low-pricing vendor for cost-benefit:

An after effect of rushing through the logistic outsourcing vendor process is that you end up
signing the deal with someone who offers the lowest rates. As Sun Tzu, the legendary military
leader once said, “The line between disorder and order lies in logistics.” Outsourcing the
function to a low-priced vendor who cuts corners might actually create chaos rather than an
orderly logistics function. There is a reason why top-notch 3PL players charge a premium rate. It
costs a lot to have personnel and processes in place to ensure perfect paperwork, timely
coordination of carriers, warehouse management and much more.

3. Not specifying roles and responsibilities in writing:

Logistics is a subset of supply chain management which by itself is a combination of several
micro-steps. This increases the complexity in logistics planning and implementation.
Unless the roles, responsibilities and tasks of each party take the form of an explicitly written a
Service Level Agreement (SLA), there could be serious complications when the process kicks
into action.

4. Not viewing logistics outsourcing as a strategy:

Logistics plays a key role in the overall strategy of an organization. Moreover, the business
environment and customer demands are not what they used to be a few years ago. E-commerce,
mobility, on-demand services and other advancements, have reformed the commerce landscape.
If you are outsourcing logistics merely as a function to be done with, and not as a strategic
element, then the business is not going to gain much despite the economy of scale.

5. Disconnect between clients & outsourcing agents:

Does your logistic outsourcing agent really know what you are trying to do? Is it last mile
delivery that your focus is on or faster delivery than the competition? A lack of consensus
between the parties can lead to a waste of resources and also lead to cost overruns and delayed
deliveries.