Role of Logistics in Supply Chain


  • (Definition) Logistics is the art and science of obtaining, producing and distributing material and product in the proper place and in proper quantities.
  • This involves management of:
    • Order processing
    • Warehousing
    • Transportation
    • Materials handling
    • Packaging

All of this should be integrated through a network of facilities.

  • Logistics adds value to the supply chain process if inventory is strategically positioned to achieve sales. But the cost of creating this value is high.
  • The largest contributor to logistics cost is transportation: the movement of raw materials to a processing plant, parts to a manufacturer , and finished goods to wholesalers, retailers and customers.
  • “Supply chain management is logistics taken to a higher level of sophistication. – Douglas Long.
  • Inventory and Forecasting must be considered when designing and managing an effective, efficient system for moving goods quickly from place to place.

Logistics Functions

  • The supply chain is about moving or transforming raw materials and ideas into products or services and getting them to customers.
  • Logistics is about moving materials or goods from one place to another. Thus, logistics is the servant of design, production and marketing.
  • The following areas of logistics management contribute to an integrated approach to logistics within supply chain management:
    • Transportation
      • Many modes of transportation play a role in the movement of goods through supply chains: air, rail, road, water, and pipeline.
    • Warehousing
      • (Definition) Warehousing is the activities related to receiving, storing and shipping materials to and from production or distribution locations.
    • Third-and fourth-party logistics
      • The various logistics functions can be outsourced to firms that specialize in some or all of these services.
      • (Definition) A third-party logistics provider (3PL) is an entity that provides product delivery services for a buyer and supplier team. Third-part logistics providers actually perform or manage one or more logistics services.
      • (Definition) A fourth-party logistics provider (4PL) is a logistics specialist that plays the role of general contractor by taking over the entire logistics function for an organization and coordinating the combination of divisions or subcontractors necessary to perform the specific tasks involved.
    • Reverse logistics (or reverse supply chain)
      • This is the area which determines how best to handle the return, reuse, recycling, or disposal of products that make the reverse journey from customer to the supplier.

Logistics Value Proposition

  • Being able to match key customer expectations and requirements to your firm’s operating competency level and customer commitment is the essential ingredient in optimizing the value of logistics.
  • The value stems from your ability to know exactly how to balance logistics costs against the appropriate level of customer services for each of your key customers.
  • If you keep in mind that logistics must be managed as an integrated effort to achieve customer satisfaction at the lowest total cost, then it makes sense that the following are the key elements in this proposition:
    • Service
      • Technology isn’t the limiting factor for logistics for most companies – it’s the economics.
      • The key is to determine how to outperform competitors in a cost-effective manner.
    • Cost Minimization
      • The second element of the value proposition, cost minimization, should be interpreted as the total cost of logistics in order to be accurate.
      • (Definition) Total cost concept of logistics is the idea that all logistical decisions that provide equal service levels should favor the option that minimizes the total of all logistical costs and not be used on cost reductions in one area alone, such as lower transportation charges.
      • Today’s leading supply chain companies develop functional cost analysis and activity-based costing activities that accurately measure the total cost of logistics. The goal now is for logistics to be cost-effective as determined by a cost-benefit analysis, taking into account how logistical service failure would impact a customer’s business.

Logistics Goals & Strategies

  • At the highest level, logistics shares the goal of supply chain management: “to meet customer requirements.”
  • There are a number of logistics goals that most experts agree upon:
    • Respond rapidly to changes in the market or customer orders.
    • Minimize variances in logistics service.
    • Minimize inventory to reduce costs.
    • Consolidate product movement by grouping shipments.
    • Maintain high quality and engage in continuous improvement.
    • Support the entire product life cycle and the reverse logistics supply chain.
  • An effective logistics strategy depends upon the following tactics:
    • Coordinating functions (transportation management, warehousing, packaging, etc.) to create maximum value for the customer.
    • Integrating the supply chain.
    • Substituting information for inventory.
    • Reducing supply chain partners to an effective minimum number.
    • Pooling risks.
Coordinating Functions
  • Logistics can be viewed as a system made up of interlocking, independent parts. From this perspective, improving any part of the system must be done with full awareness of the effects on other parts of the system.
  • You need a cross-functional approach in logistics, just as you do in supply chain management as a whole. Teams that cross functions are also very likely to cross company boundaries in a world of international supply chains with different firms focused on different functions.
  • The overall goal of logistics management is not better shipping or more efficient location of warehouses but more value in the supply network as measured by customer satisfaction, return to shareholders, etc.
Integrating the Supply Chain
  • Integrating the supply chain requires taking a series of steps when constructing the logistics network. In a dynamic system, steps may be taken out of order and retaken continuously in pursuit of quality improvements:
    • Locate in the right countries
    • Develop an effective export-import strategy
    • Select warehouse locations
    • Select transportation modes and carriers
    • Select the right number of partners
    • Develop state of the art information systems
Substituting Information for Inventory
  • Physical inventory can be replaced by better information in the following ways:
    • Improve communications
      Talk with suppliers regularly and discuss plans with them.
    • Collaborate with suppliers
      Use JIT to coordinate deliveries from suppliers. Remove obsolete inventory. Use continuous improvement tools and share observations about trends.
    • Track inventory precisely
      Track the exact location of inventory using bar codes and/or RFID (Radio Frequency Identification) with GPS (Global Positioning Systems).
    • Keep inventory in transit
      – It’s possible to reduce system wide inventory costs by keeping inventory in transit.
      – One method of keeping inventory in motion the maximum amount of time is a distribution strategy called cross-docking.
      (Definition) Cross-docking is the process of packing products on incoming shipments so they can be easily sorted at intermediate warehouses or for outgoing shipments based on final destination. The items are carried from the incoming vehicle docking point to the outgoing vehicle docking point without being stored in inventory at the warehouse.
    • Use postponement centers
      Avoid filling warehouses with the wrong mix of finished goods by setting up postponement centers to delay products assembly until an actual order has been received.
    • Mix shipments to match customer needs
      Match deliveries more precisely to customer needs by mixing different SKUs on the same pallet and by mixing pallets from different suppliers.
    • Don’t wait in line at customs
      Reduce the time spent in customs by clearing freight while still on the water or in the air.
Reducing Supply Chain Partners to an Effective Number
  • You have to watch out for tradeoffs in effectiveness when reducing the number of logistics partners, you can generally increase efficiency by doing so.
  • If possible, look for an entire echelon you can do without.

  • The more partners there are in the chain, the more difficult and expensive the chain is to manage.
  • Handoffs among partners cost money and eat up time.
  • Having many partners means carrying more inventory.
  • Reducing the number of partners can reduce operating costs, cycle time, and inventory holding costs.
  • There is however some lower limit below which you create more problems than you solve.
Pooling Risks
  • (Definition) Risk pooling is a method often associated with the management of inventory risk. Manufacturers and retailers that experience high variability in demand for their products can pool together common inventory components associated with a broad family of products to buffer the overall burden of having to deploy inventory for each discrete product.
  • By using a central warehouse to hold parts common to many products, a supply network can reduce storage costs and the risk of stock outs that would be experienced in smaller, decentralized warehouses.
  • There are tradeoffs to consider. The central warehouse may be further away from some production facilities than the smaller warehouses would be, lead times and transportation costs are likely to go up in that case.
  • Logistics has to be managed from the point of view of improving the value of the overall system, not just one part of the system.

Flow of Goods and Information

  • The enterprise must have internal process integration and collaboration between functions as well as alignment and integration across the supply chain.

About Paresh Sharma

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