name of the staff : dr.vanishree , assistant professor

Reference : Logistics Management & World seaborne Trade – Dr.Krishnaveni Muthaih

Name of the Staff : Dr.Vanishree , Assistant Professor , Department of Commerce (IB), GAC,Cbe

Name of the subject : Fundamentals Of Logistics

Subject Code : 18BIB42C

Unit :I



FUNDAMENTALS OF LOGISTICS

1. MARKETING LOGISTICS SYSTEM

Logistics is concerned with getting products and service where they are needed when

they are desired. Consumer’s products to be readily available and fresh, that they take for

granted a high level of logistical competency. No marketing or manufacturing process can be

accomplished without logistical support.

Logistics has been performed since the beginning of civilization. However, in today’s

world, where there is realisation of 'Global Village' and 'Borderless World', implementing the

most efficient practice of logistics has become one of the most exciting and challenging areas

of business. The operating responsibility of logistics is the geographical positioning of raw

materials, work-in-progress and finished inventories where required at the lowest cost

possible.

CONCEPT

Business logistics is the planning, organising and controlling of all move- store

activities that facilitate product flow from the point of raw material acquisition to the point of

final consumption, and the necessary information flows, for the purpose of providing a

sufficient level of customer service in a cost-effective manner.

The origins of business logistics can be traced to developments that occurred in

military logistics during World War II. Ability to move and store personnel and supplies

efficiently contributed much to the success of the war effort.

Business logistics is a comprehensive system. It involves the integration of

information, transportation, inventory, warehousing, material handling and packaging. These

jobs combine to make overall logistics management a challenging and rewarding career. Over


the years, many titles have been used to describe all or parts of logistical-integrated supply

chain process, namely business logistics, physical distribution, materials logistics

management materials management, physical supply, logistics of distribution, marketing

logistics, inbound logistics and total distribution.

In 1991, the Council of logistics Management modified its 1976 definition of physical

distribution management by first changing the term to logistics and then changing the

definition as follows:

"Logistics is the process of planning, implementing and controlling the efficient,

effective flow and storage of goods, services and related information from the point of origin

to the point of consumption for the purpose of conforming to customer requirements."

The definition reflects the need for total movement management from point of

material procurement to location of finished product distribution.

OBJECTIVES

Logistics adds value when inventory is correctly positioned to facilitate sales. But

creating logistics value is costly. Logistics expenditure typically range from 5 to 35 per cent

of sales depending on the type of business, geographical area of operation, and weight/value

rates of products and materials. Logistics accounts for one of the highest costs of doing

business; second only to materials in manufacturing or cost of goods sold in wholesaling or

retailing. Logistics though vital to business success, is also expensive.

But in spite of cost, what most firms are interested in, is not only cost reduction, but

also the challenge in achieving logistical competency to gain competitive advantage.

Firms that enjoy world-class logistical competency can gain competitive advantage by

providing customers with superior service. By performing above industry average in terms of


inventory availability as well as speed and consistency of delivery, logistically sophisticated

firms are attractive supplier and ideal business partners.

The overall effect is that, the goal of logistics is to achieve a targeted level of

customer service at the lowest possible total cost. That is, it aims to service the demand

created by marketing efforts. By efficient servicing of the demand, customer satisfaction is

aimed at, such that, a network of satisfied customer is built in, learning to increase in the

market share and competitive advantage resulting in higher profitability of the business.

LOGISTICS AND BUSINESS PROFITABILITY: Tangible improvements in cost quality

and service are critical in modern competitive markets. More and more senior executives now

realise the importance of logistics to the success of their corporate strategies. In the

companies, logistics excellence enables them to turn an activity traditionally considered a

"service function" into a strategic resource contributing measurably to market share and

profitability.

LOGISTICS AND THE VALUE CHAIN CONCEPT: To gain competitive advantage, for

creating and sustaining superior Performance, Michael Porter describes how a company can

put generic strategies (cost leadership, differentiation and focus into practice.

The value chain concept (adopted from Michael Porter's Model) identifies five

primary activities, [namely (l) Inbound logistics, (2) Operations, (3) Outbound logistics, (4)

Marketing and Sales, (5) Service] backed by support activities, [namely (i) Company

infrastructure, (ii) Organisation, People and Methods, (iii) Systems and Technology and (iv)

Procurement] all together form the activities which creates value to the product / service of

the business firm.


Porter's Value Chain

Manufacturing companies create value by acquiring raw materials and using them to

produce something useful. Retailers bring together a range of products and present them in a

way that's convenient to customers, sometimes supported by services such as fitting rooms or

personal shopper advice. And insurance companies offer policies to customers that are

underwritten by larger re-insurance policies. Here, they're packaging these larger policies in a

customer-friendly way, and distributing them to a mass audience.

The value that's created and captured by a company is the profit margin:

Value Created and Captured – Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it is likely to be. And

when you provide more value to your customers, you build competitive advantage.

Understanding how your company creates value, and looking for ways to add more value, are

critical elements in developing a competitive strategy. Michael Porter discussed this in his

influential 1985 book "Competitive Advantage," in which he first introduced the concept of

the value chain.

A value chain is a set of activities that an organization carries out to create value for

its customers. Porter proposed a general-purpose value chain that companies can use to

examine all of their activities, and see how they're connected. The way in which value chain

activities are performed determines costs and affects profits, so this tool can help you

understand the sources of value for your organization.

https://www.amazon.com/Competitive-Advantage-Creating-Sustaining-Performance/dp/0684841460/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1226480657&sr=8-1


Elements in Porter's Value Chain

Rather than looking at departments or accounting cost types, Porter's Value Chain

focuses on systems, and how inputs are changed into the outputs purchased by consumers.

Using this viewpoint, Porter described a chain of activities common to all businesses, and he

divided them into primary and support activities, as shown below.

Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a

product or service. They consist of the following:

Inbound logistics – These are all the processes related to receiving, storing, and

distributing inputs internally. Your supplier relationships are a key factor in creating value

here.


Operations – These are the transformation activities that change inputs into outputs

that are sold to customers. Here, your operational systems create value.

Outbound logistics – These activities deliver your product or service to your

customer. These are things like collection, storage, and distribution systems, and they may

be internal or external to your organization.

Marketing and sales – These are the processes you use to persuade clients to

purchase from you instead of your competitors. The benefits you offer, and how well you

communicate them, are sources of value here.

Service – These are the activities related to maintaining the value of your product or

service to your customers, once it's been purchased.

Support Activities

These activities support the primary functions above. In our diagram, the dotted lines

show that each support, or secondary, activity can play a role in each primary activity. For

example, procurement supports operations with certain activities, but it also supports

marketing and sales with other activities.

Procurement (purchasing) – This is what the organization does to get the resources

it needs to operate. This includes finding vendors and negotiating best prices.

Human resource management – This is how well a company recruits, hires, trains,

motivates, rewards, and retains its workers. People are a significant source of value, so

businesses can create a clear advantage with good HR practices.

Technological development – These activities relate to managing and processing

information, as well as protecting a company's knowledge base. Minimizing information

technology costs, staying current with technological advances, and maintaining technical

excellence are sources of value creation.


Infrastructure – These are a company's support systems, and the functions that allow

it to maintain daily operations. Accounting, legal, administrative, and general

management are examples of necessary infrastructure that businesses can use to their

advantage.

Companies use these primary and support activities as "building blocks" to create a valuable

product or service.

Using Porter's Value Chain

To identify and understand your company's value chain, follow these steps.

Step 1 – Identify subactivities for each primary activity

For each primary activity, determine which specific subactivities create value. There are three

different types of subactivities:

Direct activities create value by themselves. For example, in a book publisher's

marketing and sales activity, direct subactivities include making sales calls to bookstores,

advertising, and selling online.

Indirect activities allow direct activities to run smoothly. For the book publisher's

sales and marketing activity, indirect sub activities include managing the sales force and

keeping customer records.

Quality assurance activities ensure that direct and indirect activities meet the

necessary standards. For the book publisher's sales and marketing activity, this might

include proofreading and editing advertisements.

Step 2 – Identify sub activities for each support activity.

For each of the Human Resource Management, Technology Development and

Procurement support activities, determine the sub activities that create value within each

primary activity. For example, consider how human resource management adds value to


inbound logistics, operations, outbound logistics, and so on. As in Step 1, look for direct,

indirect, and quality assurance sub activities.

Then identify the various value-creating subactivities in your company's

infrastructure. These will generally be cross-functional in nature, rather than specific to each

primary activity. Again, look for direct, indirect, and quality assurance activities.

Step 3 – Identify links

Find the connections between all of the value activities you've identified. This will

take time, but the links are key to increasing competitive advantage from the value chain

framework. For example, there's a link between developing the sales force (an HR

investment) and sales volumes. There's another link between order turnaround times, and

service phone calls from frustrated customers waiting for deliveries.

Step 4 – Look for opportunities to increase value

Review each of the sub activities and links that you've identified, and think about how

you can change or enhance it to maximize the value you offer to customers (customers of

support activities can be internal as well as external).

Porter (it is believed) is the first leading business scholar to recognise how logistics

function fits into the business to acknowledge this process and link it specifically to

competitive advantage. In the value chain concept developed by him logistics represents two

of the five primary business activities that add value to a product. The value chain concept

may be used to identify and understand the specific sources of competitive advantage and

how they relate to buyer value. Porter asserts that competitive advantage is derived from the

value a company creates for its buyers.


LOGISTICS INTERFACE WITH MARKETING

Earlier in this century, functions now grouped under the term logistics were part of

marketing. In 1950's 60's, marketers tended to focus on product promotion and development,

neglecting areas of warehousing, transport and inventory control. The realisation that storage

and distribution costs were absorbing an increasing percentage of sales revenue sparked a

renewed interest in this area in late .1960's and 70's.

Over time, logistics assumed primary responsibility for warehousing, Inventory and

transport within many organisations, with marketing responsible for negotiation, promotion

and selling. Now days it has been recognised that marketing and logistics functions are

strategic resources, to be best employed as part of an overall strategic plan. Logistics has the

task of ensuring that demand generated by marketing is actually serviced or fulfilled as

shown figure 1.1.

Logistics is concerned with getting products and services where they are needed when

they are desired. Lt is difficult to visualise accomplishing any marketing or manufacturing

without logistical support.


MARKETINF LOGISTICS INTERFACE

Logistics has been performed since the beginning of civilisation. However, implementing

best practice of logistics has become one of the challenging operational areas of business.

Logistics involves the integration of information, transportation, warehousing,

material handling and packaging.


Logistics in many a company accounts for 20 to 25 per cent of the cost of doing

business. Some of the costs involved in logistics between two points are:

Extra inventory at the factory

Packing

Transport to dock and loading charges

Paper work

Transportation charges of ocean liner or airline

Inventory enroute and waiting to clear customs

Customs broker charge and other paper work

Import duty

Repackaging if necessary

Inspection at the sales outlet

LOGISTICS AND PRODUCT LIFE CYCLE: To plan marketing strategy in a dynamic

context, managers often use life cycle modelling. Emphasis in marketing mix varies

according to the stage of product life cycle.

STAGE EMPHASIS IN MARKETING MIX

Introduction Promotion

Growth Distribution

Maturity Price

Saturation Price

Decline Cost Reduction


The levels of logistics support required by marketing vary as a product moves through

the different stages of PLC.

In the early stages timely, cost-effective fulfilment Of orders is a major requirement in

ensuring initial acceptance of the product.

Later as sales become slow and product moves into the maturity and saturation edges,

the emphasis changes to trimming costs the product faces stiff price competition.

Unless logistics managers understand what marketing is trying to achieve with each product

they cannot hope appropriate levels of logistics supports for the marketing effort.

The marketing consists of the price, product, promotion and physical distribution. The

interface of logistics with marketing as depicted by John Gattorna (figure 1.1) brings out the

interaction between the two marketing through its activity centres of (I) product development,

(ii) personal selling [iii]advertising. (iv) Sales promotion, (v) channels of distribution and

(VI) pricing creates demand for the product / service. But if this created demand is to be

capitalised, then it should be serviced promptly and effectively. Herein comes the important

contribution of logistics.

Logistics which consists of the activity centres namely, (i) transportation (inbound /

outbound), (ii) warehousing, (iii) inventory, (iv) management, (v) unitisation and (vi)

communications, contributes towards servicing the demand created by marketing efforts.

Marketing objective is to allocate resources to the marketing mix in such a manner as to

maximise the long-run profitability of the firm.

Logistics objective is to minimise total cost given the customer service objective,

where total costs equals transportation costs, warehousing costs, Order processing and

information costs, lot quantity costs, inventory carrying costs.


Marketing and logistics efforts are highly complementary. Product based decisions

and unitisation concepts have to be supportive of each other. Channel of distribution

decisions will greatly depend on the transportation and warehousing policies of the firm.

Sales promotion measures must be in coordination with the level of logistical competency of

the firms. Competitive pricing decisions can be easily reached at, if through efficient

management of the activity centres of the logistics least cost level is maintained. Thus,

marketing and logistics managers begin to think strategically, the coordination built in will

create a competitive edge for the firm, over its other competitors.

LOGISTICS SYSTEM ELEMENTS:

Logistical competency is achieved by coordinating into a network design:

1. Information

2. Transportation

3. Inventory

4. Warehousing

5. Material handling

6. Packaging/Unitisation

When economists originally discussed supply-and-demand relationships, facility

location and transportation cost differentials were assumed to be either non-existent or equal

among competitors.

Given a facility network and information capability, transportation is the operational

area of logistics (that geographically positions inventory. Because of its fundamental

importance and visible cost, transportation has received considerable managerial attention


over the years. Almost all enterprises, big and small, have managers responsible for

transportation. Finding and managing the desired transportation mix is a primary

responsibility of logistics.

Network of three of the functional areas of logistics— information, transportation,

and inventory — can be engineered into a variety of different operational arrangements. Each

arrangement will have the potential to achieve a level of customer service at an associated

total cost. In essence, these three functions combine to create a system solution for integrated

logistics. The final functions of logistics — warehousing, material handling, and packaging

— also represent an integral part of an operating solution. However, these functions do not

have the independent status of the three previously discussed. Warehousing, material

handling and packaging are an integral part of other logistics areas. For example,

merchandise typically needs to be warehoused at selected times during the logistics process.

Transportation vehicles require material handling for efficient loading and unloading. Finally,

the individuals are most efficiently handled when packaged together into shipping cartons or

other types of containers.

Logistics is viewed as the competency that links an enterprise with its customers and

suppliers. Information from and cus10tncrs flows through the enterprise in the form of sales

activity, forecasts, and orders. The whole process is viewed in terms of two interrelated

efforts, inventory flow and information flow.

Information flow is a key element of logistics operations, information flow, increases

both operating cost and decreases customer satisfaction. Electronic information movement

and management provide the opportunity to reduce logistics expense through increased

coordination and to enhance service by offering information to customers.


Information flow was often overlooked because it was not viewed as being important

to customers. The Council of Logistics Management recognized this change in 1988 when it

incorporated "material, in-process, finished goods and formation" into its definition of

logistics.

Transportation is a key activity in the logistics value chain as it moves through the

various stages of production and ultimately to the consumer. Primary functions, include

product movement, product storage and integration of international production and

distribution operation. The major principles involve economies of scale and economies of

distance.

While effective distribution systems should not be designed to hold inventory for an

excessive length of time, there are occasions when inventory storage is justified.

While the traditional warehousing role has to maintain a supply of goods protect

against uncertainty, contemporary warehousing offers many other value-added services.

These can describe in terms of economy and service benefits. Economic include

consolidation, break bulk and cross dock, processing/ postponement and stocking service

benefits include spot stocking assortment mixing product support and market presence.

The handling of products is a key to warehouse productivity. Handling activities

include receiving, in storage handling, and shipping. Packaging has a significant impact on

the cost and of the logistical system. Integrated logistics approach to packaging operations

can yield dramatic savings.

A marketing mix is a compilation of activities designed to attract customer while

simultaneously achieving business objectives. The so-called four p's product/ service,

promotion, price, and place — constitute a generic mix. The key to formulating an effective


mix strategy is to integrate resource committed to these activities into an effort that

maximizes customer impact. Logistics ensures that customer requirements involved in timing

and of inventory and other related services are satisfactorily Thus, output of logistical

performance is customer service Logistical competence a tangible way to attract customers

who place a premium on time and place related performance.

Thus, the discussion on the objectives, logistics interface with marketing and the

system elements brings out the depth of the scope of logistics in efficient functioning of any

business entity. The key to world-class logistics to achieve integration of internal and external

objectives requires clear identification concerning the role that logistical competency is to

play in overall enterprise strategy.

name of the staff : dr.vanishree , assistant professor

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