What is Logistics Management?

The objective is to plan and coordinate all the activities necessary to achieve desired level of delivered service and quality at lowest possible cost. The scope of logistics include the entire gamut of activities starting from the procurement and management of raw materials through to delivery of final product to the customer. The ultimate purpose of any logistics system is to satisfy the customer by establishing linkages of people at all levels in the organization directly or indirectly to the market place.
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 As it is getting increasingly difficult to maintain a competitive edge through product alone, customer service has started to provide the distinctive difference between one companys offer and that of its competitors. The underlying concept is The process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and the related information flows through the organization and its marketing channels in such a way that the current and future profitability are maximized through the cost effective fulfillment of orders.
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Competitive Advantage
Customers seeking benefits at acceptable cost

Company A (Asset utilization)

Cost differential

Company B (Asset utilization)

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Source of Competitive Advantage

Competitive advantage is the ability of an organization to differentiate itself in the eyes of the customer, from its competition, and to operate at a lower cost and hence greater profit. Competitive advantage helps organizations to achieve commercial success which mainly depends upon two factors cost advantage and value advantage. 4

Commercial success

Cost advantage

Value advantage

 Cost advantage or Productivity advantage - Characterized by low cost of production due to greater sales volume, economies of scale enabling fixed costs to be spread over a greater volume and the impact of the experience curve. Value advantage is in terms of product offering a differential plus over competitive offerings. - Based on marketing concept that customers that customers don't buy products, they buy benefits. - Benefits may be intangibles and may not relate to specific product features. - It can be an image or reputation or even some functional aspects. 6

 Adding value through differentiation is extremely powerful means of achieving competitive edge in the market. One of the significant method of adding value is service. Service helps in developing relationship with the customers through provision of an augmented offer. Augmentation takes many forms such as delivery services, after-sales services, financial packages, technical support etc.
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Productivity and Value Matrix

V a l u e A d v Service Leader (3) Cost and Service Leader (4) Cost Leader (2)

Commodity Market (1)

Productivity Advantage
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 For companies in quadrant (1), the market is uncomfortable place as their products cannot be differentiated from their competitors offerings as they do not have any cost advantage. These are commodity markets. Companies in quadrant (2), adopt cost leadership strategies. Traditionally, these are based on economies of scale gained through volume. Another route to achieving cost advantage is through logistics management. As logistics constitutes a major proportion of total costs, reengineering logistics processes results into substantial cost reduction.
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 Companies in quadrant (3), seek differentiation through service excellence since markets are becoming more and more service sensitive. Customers expect greater responsiveness and reliability from the suppliers, reduced lead times, just-in-time delivery, and various other value added services. Services strategies can be developed through enhanced logistics management. Companies in quadrant (4) are distinctive in value they deliver and are also cost competitive. Competitors find it hard to attack these companies which try to excel in all the value chain activities.
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ValueValue Chain Activities Chain Activities

Primary Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Secondary Activities Infrastructure Human Resource Management Technology Development Procurement

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 Primary activities represent the functional areas like arranging inputs for transforming them into output, and managing distribution, marketing, sales, and services. The secondary activities facilitate the integration of all the functions across the entire organization. The companies can achieve competitive advantage and create differentiation by organizing and performing these activities more efficiently or in a unique manner than their competitors. 12

Factors affecting value and productivity advantage

A. Productivity advantage - Capacity utilization - Asset utilization - Inventory reduction - Integration with the suppliers. B. Value advantage - Customized services - Reliability - Responsiveness.

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Underlying Philosophy Behind Logistics Concept

Materials Flow
Suppliers Procurement Operation Distribution Customers

Information Flow

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 The objective of logistics is to link the market place, distribution network, the manufacturing process and procurement activity, so as to provide higher levels of services to the consumers yet at a lower cost. Scope of logistics management encompasses management of raw materials and other inputs through the delivery of the final product.

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How do we define logistics management?

A process of satisfying customer needs through coordination of materials and information flows that extend from the market through the firms operation and beyond that to the suppliers. A shift to an integrated orientation from the conventional manufacturing or marketing orientation. Traditionally, manufacturing and marketing have been considered as separate activities each having different priorities. 16

 Manufacturing priorities and objectives are concerned with achieving operating efficiencies based on long production runs, minimized set ups and changeovers, and product standardization. Marketing priorities and objectives are concerned with achieving competitive advantage based on varieties, high service levels, and frequent product changes. Customer orientation and cost competitiveness has been integrated by introducing flexible manufacturing systems, practicing inventory management policies based on manufacturing requirement planning and just-in-time inventory policy, laying sustained emphasis on quality and integrating supply side issues in strategic plans.
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How do we define supply chain?

A network of organizations that are having linkages, both upstream and downstream in different processes and activities that produce and deliver value in the form of products and services in the hands of ultimate consumer.
Customers Retailers Shirt Manufacturer Weavers of Fabrics Yarn/Fibre mfrers

Downstream

Upstream
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 A shirt manufacturer is a part of supply chain that extends upstream through the weavers of fabrics to the spinners and the manufacturers of fibres, and downstream though distributors and retailers to the final consumers. Though each of these organizations are dependent on each other yet traditionally do not closely cooperate with one another.

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Is Supply chain management same as vertical integration?

SCM is not the same as vertical integration. Vertical integration implies ownership of upstream suppliers and downstream customers. Earlier, vertical integration used to be the desirable strategy but increasingly the companies are focusing on their core business i.e. the activities that they do really well and where they have a differential advantage. Everything else is outsourced.
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Implementation of SCM through Logistics Management

SCM raises the challenge of integrating and coordinating the flow of materials from multitude of suppliers, including offshore, and similarly managing the distribution of the finished product by way of multitude intermediaries. Transferring costs upstream or downstream leads to logistics myopia as all costs ultimately will make way to the final market place to be reflected in the price paid by the end user. The prime objective of SCM is to reduce or eliminate the buffers of inventory that exists between the organizations in a chain through sharing of information on demand and current stock levels. 21

How does Logistics differ from SCM?

Logistics management is primarily concerned with optimizing flows within the organization. Supply chain management deals with integration of all partners in the value chain. Logistics is essentially a framework that creates a single plan for flow of products and information through a business. Supply chain builds upon this framework and seeks to achieve linkage and coordination between processes of other entities in the pipeline i.e. suppliers and customers, and organization itself. 22

Impact of Logistics and Customer Service on Marketing

Traditionally, marketing has focused on endcustomer or consumer, seeking to promote brand values and to generate a demand pull in the market place for companys products. Due to shift in power in marketing channels, companies are realizing to develop strong relations with such intermediaries like large retail outlets to create a customer franchise as well as consumer franchise. The impact of both strong consumer franchise and customer franchise can be enhanced or diminished by effectiveness of suppliers logistics system.
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Consumer Franchise Brand values Corporate image Availability

Customer Franchise Customer Services Partnership Quick Response

Supply Chain Efficiency Flexibility Reduced Inventory Low cost supplier

Marketing Effectiveness Market Share Customer Retention Superior ROI

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Activities Included in Logistics

Logistics competency is achieved by coordinating the following functional areas. - Network design - Information - Transportation - Inventory - Warehousing, material handling and packaging.
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