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Logistics generic THMB Logistic management: A smart way to reduce cost and increase efficiency

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Writuparna Kakati | 01 Nov, 2008

What is your definition of logistic management? The Oxford English dictionary defines logistics as: "The branch of military science having to do with procuring, maintaining and transporting material, personnel and facilities." Surprised by the definition ! But it is what the term 'logistics' was widely used to refer to a few decades ago. 

Derived from the ancient Greek word 'λόγoς' ('logos'—'ratio, word, calculation, reason, speech, oration'), the term 'logistics' is considered to have originated in the military's need. In ancient Greek, Roman and Byzantine army, military officers with the title 'Logitikas' were responsible for financial and distribution of supplies. Soldiers moved from their base to a forward position and they need to supply themselves with arms, ammunition and rations. Wars were won or lost on the strength of logistics capability or lack of it.

Although quite an old concept, the term 'logistics' started to be used widely in the business world since the early 1990s when globalization, coupled with liberalisation, triggered intense business competition and forced both private and public firms to commit themselves to meet the challenges of market. In an increasingly globalized supply chain, it became necessary for businesses to avail their customers 'the right item in the right quantity at the right time at the right place at the lowest cost'.

Managing supply of goods from supplier to to buyer is an important aspect of marketing. In export business, the importance of efficient logistic management considered much more due to the complexities involved in it. An exporter secures an overseas order after a great deal of effort and his achievement depends largely on the timely and successful execution of the same in terms of timely delivery. Logistics or 'physical distribution' refers to the art of managing the flow of products or material from producer or supplier to the customer or user and is thus concerned with creation of time and place utility.

Logistics and marketing strategy
Let's delve deeper into the significance of distribution mechanism in marketing strategy and how logistics or 'physical distribution' plays its role in making marketing successful. Marketing strategy formulation is related to various elements of the marketing mix, consisting of two main types - production element and distribution element. While the production element (comprising of four elements: product, price, place and promotion) aims at creating 'form utility' by taking such marketing decisions such as product line variety, design, style, colour, brand, after sales service, etc., the distribution element concerned with distribution channel fixation and making arrangements for physical movement of the goods and services to create 'time and place utility'. Thus, physical distribution or logistic management encompasses the tasks involved in planning, implementing and controlling the physical flows of materials and finished goods from points of origin to points of use to meet the needs of customers at a profit.

Logistical strategy-planning-decision
Logistics management involves different elements related to the  planning, implementation and controlling of goods, services and information between the point of origin and the point of consumption. These elements can broadly be categorized as logistical strategy,  logistical decisions and logistical planning. Logistical strategy formulation refers to evaluation of cost effective methodology of distributing goods to market (while achieving service level objectives) while logistical planning involves logistical tool development to meet the challenges of market. Logistical decisions remains at the core of strategy and they involve complex and data intensive decisions such as 'Where and how many distribution centers should be there?', 'What should be the transportation equipment?', 'What material handling technology should be used?', etc.

Objectives of Logistics & international trade framework
The main objective of the logistics is to bring product and consumer together with 3 'R's namely,

  • right quantity of goods at the
  • right place/point at the
  • right time for the least cost.
The above 3 'R's have a very close linkage with the commercial framework of international trade which consists of the following five elements, viz.
  • a contract of sales/purchase between a seller and a buyer
  • a product or commodity which after suitable packaging will constitute the cargo
  • a transport contract which depends upon the terms of delivery
  • documentation of cargo ownership or document of title; and
  • payment of purchase and freight.

Systems elements of marketing logistics
Marketing logistics consists of two main components namely, Physical Supply (PS) or material management which is concerned with inward movement of raw material, components and spare parts, consumable stores, machinery, machinery, tools, etc. while the other element, Physical Distribution (PD), refers to that part of logistic systems which is concerned with the outward movement of finished products from the point of origin (for example, exporter's point) to the ultimate destination. The activities falling under the PS and PD are closely interlinked due to the reason that in a majority of the cases, the outward movement or physical distribution management of the products of the suppliers becomes the physical supply management of the importers or consumers at the other end or ultimate destination. Hence the system elements of marketing logistics are common both to Physical Supply (PS) and Physical Distribution (PD). These common elements are -

Raw material acquisition: Raw materials required for production are required to be brought in required quantities and at the right time so that uninterrupted production becomes possible and production can done in accordance with schedule. In addition, it is also necessary to purchase, transport and store fuels, maintenance materials, packaging materials, etc. in advance.
Inventory management: Every business needs to hold stocks of different products, raw, materials, consumable store, semi-processed and processed goods. These stocks or inventories (which are required to meet present and future demand) are the link between a customer's orders and a company's manufacturing activity, wherein customer order draws down inventory level manufacturing activity builds it up. A right balance is necessary as carrying of too much inventory is not cost-effective while too little stock may result in production problems.

Warehousing: Warehousing is essentially a storage function and is very important from marketing point of view. In many lines of business goods are produced considerably in advance of the time of sale and consequently they have to be stored for varying periods of time and thus bridging the time gap between production and demand. Functions of warehouse include receipt of goods, identification of goods by recording and numbering, sorting for appropriate storage, hold goods under protection until needed, marshal the shipment and prepare records and advice, etc.

Packaging and utilization: Packing and packaging play an important role in physical distribution system due to the reason that customer is interested in getting the product without any damage or loss. While preparing goods for shipment, care should be taken care that the same are properly packed, marked and labeled.

Transportation: It is the most important single element constituting the 'hub' of the whole logistic system on which the efficiency of other elements depends to a larger extent. It is an important responsibility in the physical distribution management both from cost standpoint and from service standard. The most important aspect of transportation decision concerns such issues as what modes of transport should be used because it is the chosen mode of transport which can either make or mar the time and cost efficiency of all other elements of marketing logistics. 

Insurance: Risk management is another important element of the trade logistic management. Although an exporter is supposed to take care of risk management in terms of payment as well as cargo, in the case of physical distribution management, the later is of greater concern to him. For this, cargo insurance ( commonly known as 'marine cargo insurance' irrespective of the mode of transport).

Communication and control: Information is the lifeline of a logistic system because without accurate and correct information, the system cannot respond efficiently. Besides, timely and correct information acts as a key component in the planning operation and control of logistic system. Traditional methods of communication comprises mails, telegrams, cables, telephones etc. IT has now made it possible to convert many of the problems in transportation, inventory management, packaging and warehousing into computer language by means of which operation of the system as a whole can be examined through model building and simulation.
Physical distribution is a major cost in any global business and can often be a critical element affecting a business' competitiveness. Traditionally, logistic management has focused on efficiency and minimisation of costs. However, as service has become more important, management focus has now shifted to concentrate more closely on maximising the return on investment, and serving the customer more profitably.

The days of straightforward transport management are getting phased out and the business of today is entering the stage of 'Totally Integrated Logistics' - in which warehousing, material handling, inventory management and communication are all recognised as an integral part of the transportation process. But in India, the marketing logistics concept, relatively speaking, is a new subject. Since it is now being recognized as the most promising area of cost reduction in global business, Indian exporters need to be more aware about logistic planning in their business. 


(This article is prepared with inputs from 'Logistics Management' published jointly by PHD Chamber of Commerce & Industry and Konrad Adenauer Foundation)

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