Logistics Management

What is Logistics?

There are two definitions given for logistics-

A) Business Terms -Logistics means the physical movement of goods from the supplier point to the receiver point. Basic functional
activities including transportation, store, loading, unloading, handling, packaging, distribution etc are integrated based on practical
needs
B) Council of Logistics Management -Logistics is 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 in order to
meet customers’ requirements
Logistics = Material Management + Distribution

Financial Impact of Logistics-

The distribution and logistics of a business have multiple impacts on the overall financial performance of the organization. When logistics are
performed effectively, it can help to improve the overall financial performance.
One of the key measures for success is the return on investment, ROI.

The high ROI ratio reflects the situation of increase in profits and reduction in capital employed. Profit can be boosted by achieving more sales
revenue.

Ways to increase profits-

 Increased sales by providing consistent service levels
 On Time in Full Delivery – Customer should get what they want, at the time they want it.
 Minimizing costs by more efficient transport system and better storage
 Improving labor efficiency and reducing inventory holding to reduce costs

Competitive advantage

Logistics help organization gain competitive advantage over its competitors.

An organization can decide to be-
-Cost leader- Aims at producing mass products at lowest cost possible
-Service leader- Aims at delivering quality service to its customers

Service/Value Advantage-
Logistics leverage opportunities
• Tailored service
• Distribution channel strategy
• Reliability
• Responsiveness
• Information
• Flexibilty

Cost/Productivity Advantage
Logistics Leverage Opportunities
• Capacity Utilization
• Asset turn
• Low inventory
• Low Wastage
Challenges posed by globalization in logistics management-
• Extended supply lead times
• Rise in inventory level
• Logistics are more complex due to multiple freight transport options
• The need for greater visibility in supply chain

Porter’s strategy in generic supply chain management-

Primary activities include-

 Inbound logistics- It includes all the processes related to bringing in raw materials, processing, distributing and storing
them
 Operations- Transforming raw materials into the product which will be sold to the customers
 Outbound logistics-Includes the final product which needs to be taken to warehouses or storage places where it can be
stored
 Marketing and sales- Marketing the products to customers to attract them to buy a company’s products instead of its
competitors
 Services- Includes after sales service

To achieve a competitive advantage a company needs to have a seamless transition between all the five phases

Supporting Activities include-

 Firm infrastructure
 Human resource management
 Technology development
 Procurement

Evolution of logistics-
 1950’s and 1960’s- Unplanned transportation and warehousing
 1970’s- Concept of Physical distribution introduced
- Physical Distribution manager appointed under whom various logistics activities like handling,transporting,packaging
etc was clubbed under a system and which was included in the functional management structure
- Lead to cost reduction and improved productivity

 1980’s- Centralized distribution, use of computer-3rd party distributors

-Material management and Physical distribution clubbed together to constitute logistics

 1990’s till present-Supply chain management

-Re-definition of goals and re-engineering of system

Logistics Parties-

 1 PL- Manufacturer itself handles the logistics activities

 2 PL- Buyer engages its own resources in handling the activities
3 PL- 3 PL’s are external companies that perform the logistics activities of a organization either complete or some selected activities

 4 PL- It includes the companies that select an appropriate 3 PL’s for the firm and along with it some other service providers as well
 5 PL- It includes managing the various components of supply chain management and transforming it into an e-business.

Channels of Distribution-

Two channels of distribution-

a) Physical Distribution channel- Deals with physical distribution of products from production point to final consumer
b) Trading/Transaction channel-Deals with non-physical aspects of transfer like negotiation sequence, ownership of goods while being
transferred etc.
Types of physical distribution channels-
Manufacturing to retail-
 Manufacturer direct to retail store- Manufacturer transfers the products to retail stores using its own vehicles
 Manufacturer via manufacturer’s distribution operation to retail store- Distribution centre which can either be a regional or central in
which the goods are stored for some time and then they are transferred to the retail shops. Whole logistics resources are owned by the
manufacturer
 Manufacturer via retail distribution centre to retail store- Same as the previous one but here logistics resources are owned by the
retailer
 Manufacturer to wholesaler to retail shop – Wholesaler acts as a intermediatory between manufacturer and the retail and wholesaler
takes care of the whole distribution. He might use his own vehicles or do it with the help of a third party
 Manufacturer to cash-and-carry wholesaler to retail shop- Used when product quantity is small. Here the retailers themselves go to the
wholesaler pay the cash and take the goods
 Manufacturer via third party distribution service to retail store- Third party distribution service takes care of the whole process
 Manufacturer via small parcels carrier to retail shop- Small parcel companies take care of the whole process
 Manufacturer via broker to retail store – Broker acts as an intermediatory between the manufacturer and the retail to transfer the goods

Direct Deliverables-
 Mail order- Products are ordered by catalogue and then goods are transferred by post
 Factory direct to home- Orders are taken through newspaper and magazine advertisements and then goods sent from
factory to customers
 Internet and shopping from home-Take the help of third party to transfer the goods
 Factory to factory/Business to business(B2B)- Used in case of industrial products

Factors affecting Channel Selection

Channel Objectives

 To make the product readily available to the consumer market

 To enhance the prospect of sales being made
 To achieve a given level of service
 To minimize logistics and total costs

Channel Characteristics

 Market characteristics: ‘Long’ or ‘Short’ channels according to the size, spread and density of the market
 Product characteristics: High-value items, complex products, time-sensitive products, products with a handling constraint
have different requirements
 Competitive characteristics: ‘Risk of substitution’ and ‘Service level provided by competitors’ to be considered

Company Resources –

• Size and financial strength of the company

• Large and cash rich companies normally can have their own distribution structure(in order to have greater control over services)

• Small and less financially secure companies may use intermediaries or third party organizations for their distribution function

Third Party Logistics (3PL’s)-

3 PL’s are external companies that perform the logistics activities of a organization either complete or some selected activities

Various 3 Pl activities are classified as-

 Planning & Equipment Functions – Includes selection of location and equipments, repair of equipments, scheduling of the
orders
 Handling Functions – Picking , packaging and distribution of the orders
 Administrative Functions – Order management invoices preparation communication a
 Warehousing & Transporting Functions – Tracking reshipment tracing of orders
Different types of 3PL’s include-

 Standard 3PL providers – Perform only the basic activities i.e picking ,packing, warehousing and transporing the materials
 Service Developers –Provide advanced value added services lie tracing the orders, tracking cross docking security systems as well
 Customer Adapters – Provide services when requested by a customer, take entre control of firms logistics operations but they do not
create their own logistics operations and completely adapt their clients logistics activities
 Customer Developers – Inherit activities of firms as well as adapt their own

Advantages of 3 PL’s-

 Improved quality of service

 Reduce capital investments on distribution

 Customer satisfaction

 Improved efficiency

Disadvantages of 3 PL’s-

 Loss of control

• Losing expertise

• Loss of customer feedback

• Company information sharing

New Generation of logistics management-

4 PL- It includes the companies that select an appropriate 3 PL’s for the firm and along with it some other service providers as well. It helps in
company reducing its overall cost but it requires 4 PL’s to have an overall knowledge of the company so that it can choose the appropriate 3 PL
provider for its clients

5 PL- It includes managing the various components of supply chain management and transforming it into an e-business.

Logistics planning framework-

Logistics planning framework is used to formulate a structural logistics plan by incorporating the corporate strategy and competitive strategy of
the company.

Key design elements include-

Logistics Process design- It ensures that the business methods are organized and aligned

Logistics network design-It includes the movement or the physical flow of the products through the company’s operations
Logistics information system design- It includes information related elements necessary to support the process and system

Logistical organizational structure- It ensures that organization structure in place does not works to the detriment of the customer or customer
service

Factors that influence Logistics Operation Design –

 Product characteristics –
-Volume to weight ratio -Low volume/ High weight means efficient utilization of storage and low transport cost
-Value to weight ratio –Low value to weight ratio leads to High transport unit costs and High ratio leads to High Storage and
inventory costs
-Substitutability – If product is highly Substitutable: Avoid stock outs, Timely replenishing of stocks
-High-risk products -Minimize risk: Special distribution system which includes High Cost

 Product life cycle –

Introductory stage: High response to demand, Stock availability and quick replenishment
Growth stage: Sales are more predictable and the requirements for distribution are now for a better-balanced, more cost effective
system.
Maturity Stage: Introduction of competitive products, Effective logistics operation becomes vital in order to maintain market share,
especially for key customers.
Decline stage: Product is becoming obsolete, the logistics system needs to support existing business but at minimum risk and cost

 Packaging –
-The packaging is broadly determined for product promotion and protection.
-Other factors include:
-Package should be easy to handle, convenient to store, readily identifiable, secure and a shape that makes best use of space-usually
cubic.
-The design and use of packaging has implications for other functions such as production, marketing and quality control, as well as for
overall logistics costs and performance.

 Unit Loads -The use of unit loads enables goods and packages to be grouped together and then handled and moved more effectively
using mechanical equipment.
-Choosing the most appropriate type and size of unit load minimizes the frequency of material movement, enables standard storage
and handling equipment to be used with optimum equipment utilization, minimizes vehicle load/unload times, and improves product
protection, security and stocktaking.

Key Logistics Processes

 Order fulfillment- Receiving & Documenting order to Selecting & Delivering goods
 New Product Introduction –two challenges faced here are-
-High demand: Insufficient flexibility
-Low demand: Oversupply of stocks
 New Product Development -Design the product to reach the market as soon as possible.
 Product Return-Through existing or new distribution network
 Aftermarket/ Service parts Logistics -Service parts to support continuous use
- Neither physical structure nor processes capable of providing support
 Information Management -Detailed information available for individual customers and Distribution specific customer service
requirements

Principles of Warehousing

Warehouse is a place where raw materials or manufactured goods may be stored prior to their distribution for sale.

Types of classification of warehouses within supply chains-

1 By the stage in the supply chain -materials, work in progress, finished goods or returned goods

2 By Geographic Area -global, regional, national, local

3 By Product Type-small parts, large assemblies, frozen food, perishables, security items, hazardous goods
4 By Function-inventory holding, sortation, etc

5 By Ownership -owned by the user or a third party logistics company

6 By Company Usage -dedicated warehouse or a shared-user warehouse for supply chains of several companies

7 By Area-less than 100 sq. mts to over 100,000 sq. mts

8 By Height -only about 3 m high to ‘high-bay’ warehouses over 45 m in height

9 By Equipment -large manual operation to a highly automated warehouse

Warehousing functions-

 Receiving, Physical unloading, unpacking & repackaging & Quality Control checks
 Put away, Reserve Storage & Replenishment
 Order picking & Sortation
 Collation, Added Value Services & Packing
 Marshalling (look for defects, assemble & arrange) & Dispatch

Role of warehouses-

 Inventory Holding Point - Holding substantial inventory

-Holding critical parts in case of breakdown
-Act as repository
 Consolidation Centre -Bringing together several product lines (own or other inventory holdings in supply chain) to be delivered
together
 Cross-dock centre -Goods transferred from incoming to outgoing vehicle via goods-in and goods-out bays without storage
 Sortation Centre-Goods are brought specifically for the purpose of sorting to a specific region or customer
 Assembly Facility -Finally assembly point for products – knitting, testing, cutting, labeling, etc
 Returned Goods –Special warehouses for returned goods
-Due to increased internet shopping

Palletized Storage-

In this type of storage goods and items are stored in the form of pallets i.e. chunks or bundles. Different techniques involved in palletized storage
are-

1. Block Stacking – Here Objects are placed on a surface (usually a flat floor) and stacked on top of one another in blocks

2. Shuttle or Satellite Racking - It consists of a carrier shuttle used to move pallets within a specifically designed racking structure, thus
optimising the pallet storage capacity.

3 Double Deep Racking- Here Pallets stored two rows deep instead of one. It requires either a specialised forklift or a standard unit with double
deep handling attachment.

4 Push Back Racking - Pallets to be stored from 2 to 6 m deep on either side of an aisle, giving higher storage density than other forms of
racking

Non Palletized storage-

In this type of storage goods can be stored as individual items rather than in pallets. Various techniques used are-

1. Shelving, bins & drawer units - It Consist of solid metal shelves, long and deep, stacked one above the other, arranged in long rows
accessible by aisles
2. Flow Racks (Carton Live Storage)- Product is positioned on inclined rolers and rolls forward until it reaches the end stop at the
lower end. Follows FIFO
3. Carousels & Lift Modules - May be vertical or horizontal. Shelves are suspended between two chains that are rotated in vertical or
horizontal direction by electric motors (lifts).
4. Cranes & Conveyors- It consists of Cranes-moving very heavy loads (such as metal bars) within a predetermined area
 5. Challenges faced by the recent logistics industry in India-

Challenges faced by the recent logistics industry in India-

• The most essential challenge faced by the industry today is insufficient integration of transport networks, information technology and
warehousing & distribution facilities.

• The disorganized nature of the logistics sector in India, its perception as a manpower-heavy industry and lack of adequate training
institutions has led to a shortfall in skilled management and client service personnel.

• Poor facilities and management are the reason for high levels of loss, damage and deterioration of stock, mainly in the perishables
sector.

• One of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is also partly down to
lack of training

Solutions to some of the challenges-

 Infrastructure is the backbone of every country’s growth and prosperity and for the logistics industry to flourish special emphasis has
to be on building world-class road networks, integrated rail corridors, modern cargo facilities at airports.

 Good storage and Warehousing facilities are important for the growth of the logistics industry. Warehousing is required to go to the
next level taking into account the changing dynamics of JIT manufacturing, global procurement and new models of sales and
distribution.

 Emphasis on research and development is potent mainly because it encourages the use of indigenous technology which can make the
industry cost competitive and can also bring about improvement in services thereby using better, effective and efficient services.

Future prospects-

 The logistics firms are moving from a traditional setup to the integration of IT and technology to their operations to reduce the costs
incurred as well as to meet the service demands.

 The growth of the Indian logistics sector depends upon its soft infrastructure like education, training and policy framework as much as
the hard infrastructure.

 To support India’s fast paced economy growth of logistics industry is very essential. It is estimated that the Indian logistics industry
will continue to show robust growth of 10-15% annually, leading the pace of growth of the economy at large.

 With a new government many policies are expected to be implemented which will give a fresh impetus to India’s growth engine
particularly in the corporate and SME sector which in turn will expand demand for the logistics sector.

 The industry has moved from being just a service provider to the position which provides end to end supply chain solutions to their
customers. Thus, all this has paved the way for further growth of Logistics and Warehousing industry in the coming years.

Case Discussion and HR implication-

The case taken is a research paper from India which deals with the analysis of skilled workforce effect on Logistics Performance Index. Logistics
Performance Index is the weighted average of the country scores on six key dimensions: efficiency of the clearance process by border control
agencies, quality of trade and transport related infrastructure, ease of arranging competitively priced shipments, competence and quality of
logistics services, ability to track and trace consignments, timeliness of shipments in reaching destination within scheduled or expected delivery
time. Since non salary expense is less in India than world average in world of logistics, this paper highlights the importance of it. The paper was
trying to contribute to one of the enablers-Human Resources. Basically the authors want to scale down the LPI linked with the country and link it
with that of organization’s logistics performance. System Dynamics design was done with the help of software. It was based on Non Linear
equations and simulated over discrete time period of year. It was verified with the results got from first year. Casual loop diagram directly shows
how training is positively related to improvement in LPI. The diagram was made on basis of hypothesis and existing research. All the hypothesis
was corroborated. Indeed investment in HR improves LPI.
Capacity planning decisions-

While designing the capacity one should always look for best operating level. All your planning processes depend on the best operating level
you have.

Types of capacity planning decisions include-

– Break-Even Analysis

– Present-Value /Future value Analysis

– Computer Simulation

– Internal Rate of return Analysis

– Linear Programming

– Decision Tree Analysis

Break-Even analysis-

Break-even point is the no loss no gain situation. At the break-even point whatever a person invests he gets back.

At break-even point- Revenue generated=cost incurred

Cost incurred may be

-Fixed cost

-variable cost

-Let suppose- x= No. of units produced

P= price per unit

TR= total revenue = Px

F= fixed cost

V= variable cost per unit

So, TC=total cost= F+ Vx

Also at break-even point, TC=TR

So, F+ Vx= Px

Solving for x , we get-

x= F/ (P-V)

So, BEPx= Break-even point for volume x = F/(P-V)

Also, Profit= TR - TC

= Px - (F + Vx)

= Px - F - Vx

= (P - V) x - F
This formula is only suitable for single product. In case of multiple products with different price calculating BEP by volume will not work as
different units have different price. Thus the common unit to be used in this case is money.

So in Multiproduct case-

BEP= F/∑i{(1-Vi/Pi)*Wi}

Here Wi = Weightage factor