Logistics Management Study Material

Question 1: What is logistics? State with examples from real life and explain the functions of logistics with the help of those examples.

Answer: The term logistics has its origins in the military. From that perspective, it applies to the process of supplying a theatre of war with troops, equipment and supplies. We in industry borrowed this term and have applied it to the discipline known as “business logistics.” In our discussion, we will use the less accurate, but simpler term “logistics” to categorize what we do.

The Council of Supply Chain Management Professionals (CSCMP) has defined logistics as “…that part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements.” A second, more concise definition offered by CSCMP is “the management of inventory, at rest or in motion.”

“Logistic is the process of planning, implementing and controlling the efficient, effective flow of goods 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”
Logistics exists to satisfy customer requirements by facilitating relevant manufacturing and marketing operation.

The main responsibility of logistic is the geographical positioning of raw materials, work in process and finished inventories at the lowest possible cost.
Creating logistics value is costly. Logistics accounts for one of the highest costs of doing business. Logistics expenditure normally ranges from 5% to 35% of sales depending on the type of business. Thus logistics even though very important for any business success is expensive. 

VARIOUS DEFINITIONS OF LOGISTICS MANAGEMENT 

Logistic management encompasses all materials flows management, from the inflow of purchased materials into works (i.e. materials planning of raw materials components and other products, transport of materials from suppliers to works, receiving and inspection and storage of materials) materials flow through manufacturing processes (i.e. materials issues and materials handling) and material (flow to customers (physical distribution).

Institute of purchasing and supply define logistics as: 

“Logistics is the concept which seeks provide for the management and co-ordination of the activities within the supply chain from sourcing and acquisition through production, where appropriate, and on through distribution channels to the customer. The goal of logistics is the creation of competitive advantages through the simultaneous achievement of high customer service levels, optimum investment and value for money.” 

According to Bowersox and Closs:

 “Logistics management includes the design and administration of systems to control the flow of materials work in progress and finished inventory to support business unit strategy” 

From the above definitions, we conclude that:

Ø  Logistics management is the function of managing the total flow of materials which includes movement of raw materials from suppliers, in process within the firm, and movement of finished goods to the customer. 

Ø  Logistics management covers both physical flow of products as well as information flow covering reports and documentation relating to goods movement.

Ø  Logistics management evolves procedures that meet customer service at the minimum cost. 

Ø  Logistic management achieves cost reduction by speeding the flow of materials, work-in-progress and finished products. 

Logistics as a business concept evolved in the 1950s with the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain. Today, the business sector uses this term to describe the efficient flow and storage of goods from point of origin to the point of consumption. The supply chain is a vital part of this process, including transportation, shipping, receiving, storage, and management of all these areas. Within the business sector, logistics can be applied to information, transportation, inventory, warehousing, material handling, and packaging, disposal, and security. The main fields within logistics include:

1.      Procurement Logistics: is the entire process used to select suppliers and negotiate contracts for delivery of goods or services. It consists of activities such as market research, requirements planning, make or buy decisions, supplier management, ordering, and order controlling.

2.      Production Logistics: concerns itself with streamlining and controlling the flow through the supply chain from point of entry to the end, which is distribution logistics. Production logistics activities are related to organizational concepts, layout planning, production planning, and control.

3.      Distribution Logistics: is concerned with the delivery of finished products to the customer. It consists of order processing, warehousing, and transportation. Major sub-sectors within the industry include air, rail, water, and truck transportation, urban transit and ground passenger transportation, warehousing and storage, and motor vehicle repair. Logistics involve the integration of these sub sectors, including information, transportation, inventory, warehousing, material-handling, and packaging.

4.      Disposal Logistics, also known as reverse logistics: stands for all operations related to the reuse of products and materials. The main function of this field is to reduce logistics cost, enhance service, and save natural resources.

As the business world grew, this definition of logistics called for management, leading to the development of experts called supply chain logisticians. This type of leadership encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes coordination and collaboration with channel partners which can be suppliers, intermediaries, third-party service providers, and customers.

Why Logistics is Important to Your Company

Even small businesses deal with finding suppliers, if not with transporting merchandise to a store. Small business owners also conduct distribution logistics with inventory and warehousing. And, every small business owner can tell you about how they handle reverse logistics, with returned merchandise or refusal of services. Larger businesses may deal in all four logistic fields.

In the business environment, logistics either have an internal or external focuses (inbound or outbound). Depending upon the business involved, this part of the chain can be simple or complicated. For more complicated procedures, third parties often are hired to conduct any one of the four fields within business logistics.

Third-party logistics (3PL) involves using external individuals or organizations to execute logistics activities that have traditionally been performed within an organization itself. If, for example, a company decides to export its product, it may hire a person or organization to help with distribution logistics. Today, there is a movement toward building fourth-party logistics (4PL), which integrates 3PL competencies and other organizations to design, build, and run comprehensive supply chain solutions. A 4PL general contractor would manage other 3PLs, truckers, forwarders, custom house agents, and others, essentially taking responsibility of a complete process for the customer.

Another specialty includes logistics consulting services. Firms in this industry specialize in the production and distribution of goods, from the first stages of securing suppliers to the delivery of finished goods to consumers. Such firms give advice on improvements in the manufacturing process and productivity, product quality control, inventory management, packaging, order processing, the transportation of goods, and materials management and handling. In the process, these consulting firms might suggest improvements to the manufacturing process in order to use inputs better, increase productivity, or decrease the amount of excess inventory. Consulting firms in this segment of the industry also advise on the latest technology that links suppliers, producers, and customers together to streamline the manufacturing process.

Even project management requires logistics, as one vein of this science coordinates a sequence of resources to carry out projects. Typical constraints in project management include scope, time, and budget, or the same constraints involved in business logistics. The time constraint refers to the amount of time available to complete a project. The cost constraint refers to the budgeted amount available for the project. The scope constraint refers to what must be done to produce the project’s end result.

Logistics is a process of movement of goods across the supply chain of a company. However, this process consists of various functions that have to be properly managed to bring effectiveness and efficiency to the supply chain of the organisation.

Some examples of the Logistics decisions taken by the Organizations- 

Ø  A manufacturer of large moulded plastic water tanks has transport costs as a significant portion of the product cost. This is due to the fact that the weight based capacity of the trucks is underutilized by the large volume tanks. In order to build a competitive edge by reducing the product cost attempts are being made to change the product design in which the lid is a separate piece. It enables small size tanks to go into the large sized ones, resulting in the reduction of the transportation cost. Since at present the results of the research are uncertain, a location decision has been taken to manufacture the products in products in four regions rather than at one place. 

Ø  A few cement manufacturers are modifying their production structure in response to the non-availability of covered railway wagons. Cement has been sent to the distribution centers in the granulated forms so that the open wagons can be used. Fine grinding is being done prior to the secondary distribution. Packaging decisions to whether cement should be transported in bulk or in a jute bag or HDPE bags are also under consideration. 

Ø  A two wheeler manufacturer is re-examining its distribution network design as well as its warehouse location to ensure better response to satisfy customer requirements and lower total product cost by cost by optimizing on cost relating to primary distribution, secondary distribution, warehouse operations and sales tax. 

Ø  A manufacturer of sponge iron in western India is deciding on a movement plan for both its incoming raw materials and outgoing finished products. The significant issues are the transportation mode choice, shipment size and stocking levels especially since water, rail and road are possible alternatives. The issues are more complicated since the port serving the plant is minor one with limitations of vessel draft and movement being inhibited during the monsoon. Possibilities of cost saving by coordinating inbound and outbound movement add another dimension to the problems. 

Ø  Certain pharmaceuticals and chemical industries could examine their production planning with respect to their production batch size by considering the profile of orders from the dealers, thereby optimizing on set up costs, work-in-process inventory cost and finished goods inventory cost. In such industries choices can also be made regarding transportation of some products in liquid, paste or powder form. There are implications on transportation costs, conversion energy costs and packing costs.

The major functions of logistics we are discussing here.

1.      Order processing

It is an important task in functions of logistics operations. The purchase order placed by a buyer to a supplier is an important legal document of the transactions between the two parties. This document incorporates the description or technical details of the product to supply, price, delivery period, payment terms, taxes, and other commercial terms as agree.

The processing of this document is important as it has a direct relationship with the order or the performance cycle time, which indicates the time when the order is received and when the materials are received by the customer. The order processing activity consists of the following steps:

Ø  Order checking for any deviations in agrees upon or negotiated terms

Ø  Prices, payment and delivery terms.

Ø  Checking the availability of materials in stock.

Ø  Production and material scheduling for shortages.

Ø  Acknowledging the order indicating deviations if any.

2.      Inventory control

Inventory management is to keep enough inventories to meet customer requirements, and simultaneously its carrying cost should be lowest. It is basically an exercise of striking a balance between the customer service for not losing market opportunity and the cost to meet the same.

The inventory is the greatest culprit in the overall supply chain of a firm because of its huge carrying cost, which indirectly eats away the profits. It consists of the cost of financing the inventory, insurance, storage, losses, damages, and pilferage. The average cost of carrying inventory varies from 10 to 25 percent of the total inventory per year depending on the products.

3.      Warehousing

Warehousing is the storing of finished goods until they are sold. It plays a vital role in logistics operations of a firm. The effectiveness of an organization’s marketing depends on the appropriate decision on warehousing. In today’s context, warehousing is treated as switching facility rather than a storage of improper warehousing management. Warehousing is the key decision area in logistics. The major decisions in warehousing are:

Ø  Location of warehousing facilities

Ø  Number of warehouses

Ø  Size of the warehouse

Ø  Warehouse layout

Ø  Design of the building

Ø  Ownership of the warehouse

4.      Transportation

For movement of goods from the supplier to the buyer, transportation is the most fundamental and important component of logistics. When an order is placed, the transaction is not completed till the goods are physically moved to the customer’s place. The physical movement of goods is through various transportation modes. In logistics costs, its share varies from 65 to 70 percent in the case of mass-consumed, very low unit-priced products.

Firms choose the mode of transportation depending on the infrastructure of transportation in the country or region. Cost is the most important consideration in the selection of a particular mode of transport. However, sometimes urgency of the good at the customer end overrides the cost consideration, and goods are sent through the fastest mode, which is an expensive alternative.

5.      Material handling and storage system

The speed of the inventory movement across the supply chain depends on the material handling methods. An improper method of material handling will add to the product damages and delays in deliveries and incidental overheads. Mechanization and automation in material handling enhance the logistics system productivity. Other considerations for selection of a material handling system are the volumes to be handled, the speed required for material movement and the level of service to be offered to the customer.

The storage system is important for maximum space utilization (floor and cubic) in the given size of a warehouse. The material handling system should support the storage system for speedy movement (storage and retrieval) of goods in and out of the warehouse.

6.      Logistical packaging

Logistical or industrial packaging is a critical element in the physical distribution of a product, which influences the efficiency of the logistical system. It differs from product packaging, which is based on marketing objectives. However, logistical packaging plays an important role in damage protection, case in material handling and storage space economy. The utilisation of load has a major bearing on logistical packaging with regard to the packaging cost.

7.      Information

Logistics is basically an information-based activity of inventory movement across a supply chain. Hence, an information system plays a vital role in delivering a superior service to the customers.

Use of IT tools for information identification, access, storage, analysis, retrieval and decision support which is vital among the functions of logistics is helping business firms to enhance their competitiveness.

Question 2: Explain concept of warehouse and examine its functions, benefits and importance.

Answer: A warehouse may be defined as a place used for the storage or accumulation of goods. The function of storage can be carried out successful with the help of warehouses used for storing the goods. Warehousing can also be defined as assumption of responsibility for the storage of goods. By storing the goods throughout the year and releasing them as and when they are needed, warehousing creates time utility.

Need for Warehousing: Warehousing is necessary due to the following reasons.

Seasonal Production: Agricultural commodities are harvested during certain seasons, but their consumption or use takes place throughout the year. Therefore, there is a need for proper storage or warehousing for these commodities, from where they can be supplied as and when required.

Seasonal Demand: There are certain goods, which are demanded seasonally, like woollen garments in winters or umbrellas in the rainy season. The production of these goods takes place throughout the year to meet the seasonal demand. So there is a need to store these goods in a warehouse to make them available at the time of need.

Large-scale Production: In case of manufactured goods, now-a-days production takes place to meet the existing as well as future demand of the products. Manufacturers also produce goods in huge quantity to enjoy the benefits of large-scale production, which is more economical. So the finished products, which are produced on a large scale, need to be stored properly till they are cleared by sales.

Quick Supply: Both industrial as well as agricultural goods are produced at some specific places but consumed throughout the country. Therefore, it is essential to stock these goods near the place of consumption, so that without making any delay these goods are made available to the consumers at the time of their need.

Continuous Production: Continuous production of goods in factories requires adequate supply of raw materials. So there is a need to keep sufficient quantity of stock of raw material in the warehouse to ensure continuous production.

Price Stabilization: To maintain a reasonable level of the price of the goods in the market there is a need to keep sufficient stock in the warehouses. Scarcity in supply of goods may increase their price in the market. Again, excess production and supply may also lead to fall in prices of the product by maintaining a balance of supply of goods, warehousing leads to price stabilization.

Functions of Warehousing:

1. Storage:

This is the basic function of warehousing. Surplus commodities which are not needed immediately can be stored in warehouses. They can be supplied as and when needed by the customers.

2. Price Stabilization:

Warehouses play an important role in the process of price stabilization. It is achieved by the creation of time utility by warehousing. Fall in the prices of goods when their supply is in abundance and rise in their prices during the slack season are avoided.

3. Risk bearing:

When the goods are stored in warehouses they are exposed to many risks in the form of theft, deterioration, exploration, fire etc. Warehouses are constructed in such a way as to minimise these risks. Contract of bailment operates when the goods are stored in wave-houses.

The person keeping the goods in warehouses acts as boiler and warehouse keeper acts as boiler. A warehouse keeper has to take the reasonable care of the goods and safeguard them against various risks. For any loss or damage sustained by goods, warehouse keeper shall be liable to the owner of the goods.

4. Financing:

Loans can be raised from the warehouse keeper against the goods stored by the owner. Goods act as security for the warehouse keeper. Similarly, banks and other financial institutions also advance loans against warehouse receipts. In this manner, warehousing acts as a source of finance for the businessmen for meeting business operations.

5. Grading and Packing:

Warehouses nowadays provide the facilities of packing, processing and grading of goods. Goods can be packed in convenient sizes as per the instructions of the owner.

Benefits from Warehouses:

1. Regular production:

Raw materials need to be stored to enable mass production to be carried on continuously. Sometimes, goods are stored in anticipation of a rise in prices. Warehouses enable manufacturers to produce goods in anticipation of demand in future.

2. Time utility:

A warehouse creates time utility by bringing the time gap between the production and consumption of goods. It helps in making available the goods whenever required or demanded by the customers.

Some goods are produced throughout the year but demanded only during particular seasons, e.g., wool, raincoat, umbrella, heater, etc. on the other hand, some products are demanded throughout the year but they are produced in certain region, e.g., wheat, rice, potatoes, etc. Goods like rice, tobacco, liquor and jaggery become more valuable with the passage of time.

3. Store of surplus goods:

Basically, a warehouse acts as a store of surplus goods which are not needed immediately. Goods are often produced in anticipation of demand and need to be preserved properly until they are demanded by the customers. Goods which are not required immediately can be stored in a warehouse to meet the demand in future.

4. Price stabilization:

Warehouses reduce violent fluctuations in prices by storing goods when their supply exceeds demand and by releasing them when the demand is more than immediate productions. Warehouses ensure a regular supply of goods in the market. This matching of supply with demand helps to stabilise prices.

5. Minimisation of risk:

Warehouses provide for the safe custody of goods. Perishable products can be preserved in cold storage. By keeping their goods in warehouses, businessmen can minimise the loss from damage, fire, theft etc. The goods kept in the warehouse are generally insured. In case of loss or damage to the goods, the owner of goods can get full compensation from the insurance company.

6. Packing and grading:

Certain products have to be conditioned or processed to make them fit for human use, e.g., coffee, tobacco, etc. A modern warehouse provides facilities for processing, packing, blending, grading etc., of the goods for the purpose of sale. The prospective buyers can inspect the goods kept in a warehouse.

7. Financing:

Warehouses provide a receipt to the owner of goods for the goods kept in the warehouse. The owner can borrow money against the security of goods by making an endorsement on the warehouse receipt. In some countries, warehouse authorities advance money against the goods deposited in the warehouse. By keeping the imported goods in a bonded warehouse, a businessman can pay customs duty in instalments.

Importance of Warehousing In the Development of Trade and Commerce:

Warehousing or storage refers to the holding and preservation of goods until they are dispatched to the consumers. Generally, there is a time gap between the production and consumption of products. By bridging this gap, storage creates time utility.

There is need for storing the goods so as to make them available to buyers as and when required. Some amount of goods is stored at every stage in the marketing process. Proper and adequate arrangements to retail the goods in perfect condition are essential for success in marketing. Storage enables a firm to carry on production in anticipation of demand in future.

A warehouse is a place used for the storage or accumulation of goods. It may also be defined as an establishment that assumes responsibility for the safe custody of goods. Warehouses enable the businessmen to carry on production throughout the year and to sell their products, whenever there is adequate demand.

Need for warehouse arises also because some goods are produced only in a particular season but are demanded throughout the year. Similarly certain products are produced throughout the year but demanded only during a particular season. Warehousing facilitates production and distribution on a large scale.

Question 3: Describe different types of warehouses & state their relative advantages & disadvantages.

Answer: In order to meet the requirement various types of warehouses came into existence, which may be classified as follows:

Private Warehouses

Public Warehouses

Government Warehouses

Bonded Warehouses

Co-operative Warehouses

Private Warehouses - The warehouses which are owned and managed by the manufacturers or traders to store, exclusively, their own stock of goods are known as private warehouses. Generally these warehouses are constructed by the farmers near their fields, by wholesalers and retailers near their business centres and by manufacturers near their factories. The design and the facilities provided therein are according to the nature of products to be stored.

Public Warehouses - The warehouses which are run to store goods of the general public are known as public warehouses. Anyone can store his goods in these warehouses on payment of rent. An individual, a partnership firm or a company may own these warehouses. To start such warehouses a license from the government is required. The government also regulates the functions and operations of these warehouses. Mostly these warehouses are used by manufacturers, wholesalers, exporters, importers, government agencies, etc.

Government Warehouses -These warehouses are owned, managed and controlled by central or state governments or public corporations or local authorities. Both government and private enterprises may use these warehouses to store their goods.

Logistical Networking is the global scheduling and optimization of data movement, storage and computation based on a model that takes into account all the network’s underlying physical resources, in contrast with more traditional networking, which does not explicitly model storage or computation resources in the network. We call this approach to networking “logistical” because of the analogy it bears with the systems of warehouses, depots and distribution channels commonly used in the logistics of military and industrial activity.