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Logistics: At the Centre of World Trade

After reading the chapter, the students should be able to understand:

• Concepts, scope and objectives of logistics
• Logistics mix (logistics components)
• Present and future perspective of logistics
• Role of logistics in customer value delivery chain

Processes by which customer demands are met are of critical importance to an organization. Logistics is the thread that connects these processes to cost effectively create the time and place utilities essential for customer satisfaction. Logistics has helped many successful companies around the world to transform cost proposition into a value proposition, therefore leveraging the companies for a competitive edge in the dynamic and turbulent global market. Several companies are making a paradigm shift by looking at logistics as an opportunity rather than as a cost centre. They are leveraging logistics to improve the service level to the customers, to accelerate the speed of launching new products, and to enter new markets faster than before within and beyond the national boundaries.

“… in its relationship to strategy, logistics assumes the character of a dynamic force without which strategic conception is simply a paper plan”

—CDR C. Theo Vogelsang, US Navy

1.1 A PARADIGM SHIFT

In the new millennium, globalization is making national economies more and more integrated into the global economy, world trade is expanding at an exponential rate, technologies are advancing and becoming an integrating force, customers are demanding value for their money, marketers are experiencing competitive pressure, and businesses are struggling not only for growth but also for survival. This has forced business organizations around the world to reevaluate their business processes and the way they deliver the products and services to their customers. The intense competition and proliferation of product and service varieties have resulted in volatility in market demand, and hence it has become necessary for companies to manage uncertainty. Business firms around the world have started looking beyond the organizational boundaries to improve upon cost, quality, reliability, responsiveness, and relationships to manage uncertainty. In order to survive and remain profitable, both manufacturing organizations and trading companies worldwide are concentrating on the core competencies and are outsourcing peripheral processes and intermediate products. Global buying and sourcing practices have undergone total change over the past few years. This has resulted in international supply chains and innovative logistics management practices that are vastly superior, both qualitatively and in terms of scale economies. Products today are sourced from different parts of the world, assembled at different locations, and shipped to various destinations to ensure greater customer satisfaction and to eliminate unnecessary time and cost from the supply chain cycle. These trends resulted in numerous marketing opportunities worldwide through expanded global supply chains and enhanced competitiveness.

The pursuit of growth and the need to access new markets have been propelling companies around the world to search for a sustainable competitive advantage. This has led companies to greater customer consciousness and to the need for cost effectiveness. The global nature of business has forced companies to recognize the critical role of back-end operations of a logistics supply chain in today’s dynamic business environment. As business firms are focusing on production, marketing, and finance, a greater attention is required to achieve customer satisfaction through effective and efficient logistics. Due to advancement in information and communication technologies, logistics has become an integral part of e-commerce and e-business. Like an army on a war front, the business warriors on a market front are powerless without a proper logistics backup. Logistics is a source for core competency and a tool for developing competitive advantage in today’s customer-driven, market-oriented economies. Hence, business firms today cannot afford to ignore the crucial role of logistics in the supply chain of a business, which, if ignored, may be fatal for the business firm not only for the growth alone but also for survival.

1.2 LOGISTICS DEFINED

The word logistics traces its origin to the Greek word logistikos and the Latin word logisticus, meaning the science of computing and calculating. In ancient times, the term was frequently used in connection with the art of moving armies and supplies of food and armaments to the war front. The use of this word can be traced back to the seventeenth century in the French army. But during World War II, logistics gained importance in army operations as a term referencing the movement of supplies, men, and equipment across the border. The US army officially used the word “logistics” after World War II. Today logistics has acquired a wider meaning and is used in business to refer to the movement of raw materials from suppliers to the manufacturer and, finally, the movement of finished goods to the consumers.

Logistics is also referred to as a physical distribution. Philip Kotier defines logistics as “Planning, implementing, and controlling the physical flows of materials and finished goods from point of origin to point of use to meet the customer’s need at a profit.”¹ The American Council of Logistics Management defines logistics as “the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customers’ requirements.”²

Logistics management is basically an integrative process which optimizes the flow of materials and supplies through an organization and its operations to the customer. Martin Christopher says that “logistics is essentially a planning process and an information-based activity.”³ It is also described by Philip Scary as “the corporate traffic cop” directing flow of material from the source through production and distribution to the final customer. The ultimate objective of a logistics function is to support corporate goals by delivering products to the consumer at the time and place of his choice. However, this objective must be balanced against the cost of providing service.

1.3 SCOPE OF LOGISTICS

As against the old concept, which was restricted to the army, logistics has gained recognition in business organizations as an important business function and as a tool for developing competitiveness. To an organization how it delivers products and services to the customers—whether the product may be tangible or intangible—is of critical importance. The effective and efficient physical movement of the tangible product will speak about the intangible services associated with the product and the organization that is delivering it. In the case of intangible products, the delivery of tangibles at the right place at the right time will speak about its quality. Logistics is one of the major enablers of growth of trade and commerce activity in a country. At a macro level, the logistical infrastructure, such as modes of transportation, transportation equipment, storage facilities, connectivity, and information processing, are contributing to a large extent to the physical movement of goods produced in manufacturing, mining, and agricultural sectors. The speed and reliability in distribution from the place of production to the place of consumption contributes greatly to the growth of a country’s domestic and international trade. The logistics costs as a percentage of gross domestics products (GDP) of various countries are shown in Table 1.1.

 

Table 1.1 Who Stands Where in Logistics Costs

Country	Logistics cost/GDP (in per cent)	Share of 3p in overall logistics (in per cent)
China, India	13–15	<10
US	9.9	57
Europe	10	30–40
Japan	11.4	80

 

It is evident from Table 1.1 that it costs nearly USD 150 billion to move material from one user to another in India. The key issues are freights and inventory management. A country’s public distribution system needs logistical support to deliver the goods to the right place at the right time for the lowest possible cost. At micro level, logistics plays a critical role in the value delivery system of a business organization to provide a superior customer service. Hence, the mission of a logistical system is to achieve the desired level of delivered service and quality at the lowest possible cost. The scope of logistics covers management of material procurement through manufacturing to delivery of finished products to the consumer. In a nutshell, any productivity improvement that could be achieved in any part of a logistics system, whether at macro or micro levels, would help in cost reduction and proper deployment of scarce national resources to a productive purpose.

1.4 LOGISTICS—A SYSTEM CONCEPT

In a manufacturing enterprise, the business process starts with the flow of material from the suppliers to the manufacturing plant and then to the customer through the distribution channel. Traditionally, in the functional organization, the business process consists of discrete activities such as procurement, manufacturing, and distribution under the control of the respective departments. The departments may excel in their respective functions, but as an organization, their performance may be dismal. This might happen because of three reasons: (1) a lack of coordination in their activities, (2) different goals to cherish, and (3) no single agency could control them to cherish a common goal.

The concept of logistics is based on the system approach. The flow of material from a supplier to a manufacturing plant and finally to the end customer is viewed as a single chain, ensuring efficiency and effectiveness in sequential activities to achieve the objective of customer satisfaction at a reduced cost. Logistics recognizes that all the activities of material movement across the business process are interdependent and need close coordination. These activities are to be managed as a system and not as functional silos. The functional areas of logistics, termed “Logistics Mix” by Martin Christopher,⁴ consist of:

Information Flow

• Order registration
• Order checking and editing
• Order processing
• Coordination

Warehousing

• Material storage
• Load unitizing and material handling
• Site selection and network planning
• Order picking and filling
• Dispatch documentation

Inventory Control

• Material requirement planning
• Inventory level decisions for customer service objectives

Packaging

• For handling and damage prevention
• For communication
• For inter-modal transportation

Transportation

• Route planning
• Mode selection
• Vehicle scheduling

The objective of logistics is to facilitate the flow of material across the supply chain of an enterprise so as to cost effectively make available the right product at the right place at the right time. Logistics has to achieve the two polemic goals of customer satisfaction and least cost. This is possible only when all the logistics functions are working as a unified system to achieve the common goal.

1.5 CUSTOMER VALUE CHAIN

In recent years, the following three forces have changed the perspectives on logistics:

1. Globalization
2. Focus on supply chain management
3. Outsourcing of non-core-competency functional areas

The entire world has become a global village for the marketers because of the liberalization of economies of countries and the emergence of World Trade Organization (WTO), which is forcing the business organizations to supply products beyond the national boundary wherever there is a market opportunity. In such a situation, the role of logistics will include providing the time and place utility of the products to the customers.

Businesses across the world are striving to be competitive. Business organizations are struggling not only for growth but also for survival. In the process, the focus has changed to the supply chain; that is, integrating a process of procurement, processing, and distribution with one thread to deliver the value to the customer. Logistics plays a key role in the value delivery process, and the success of supply chain management greatly depends on logistics planning and its support.

Outsourcing is becoming an acceptable trend in business. Corporations have realized that doing everything by themselves does not result in effective and efficient use of the scarce resources available to them. It is better to outsource the functional areas to an expert who can do the job at the least cost and can bring effectiveness and efficiency to the operations. Logistics is an area in which a majority of the business organizations have no core competency, and hence it needs to be outsourced for operating effectiveness and efficiencies. Today, logistics is shaped into a separate service industry offering complete customized logistics solutions specific to products, shipments, customers, or markets.

Michel Porter was the first commentator to highlight the need for business organizations to understand that competitive success could only come through cost leadership or by offering differentiated product and services. Costs can be reduced by an effective logistics management, which will also enhance the differentiation through superior customer service. As shown in Figure 1.1, the value chain activities of a firm can be categorized into primary activities consisting of inbound logistics; operations; outbound logistics; marketing, sales, and services; and support activities such as in frastructure, human resource management, technology development, and procurement.

Logistics delivers value to the customer through three logistical phases:

1. Inbound logistics—Operations preceding the manufacturing. This includes movement of raw materials and components for processing from suppliers.
2. Process logistics—Operations directly related to processing. This includes storage and movement of raw materials and components within the manufacturing premises per the manufacturing schedules. The inventory management of stored materials and in-process goods is part of process logistics.
3. Outbound logistics—Operations following the production process. This includes the warehousing, transportation, and inventory management of finished products.

In all above categories of logistics, both physical flows of products from a raw material supplier to the end customer in the forward direction and flow of information from market to the raw material supplier in the reverse direction are monitored and controlled.

Logistics cost break-up in the above three categories shows a larger percentage in outbound logistics and in component-wise, transportation (see Table 1.2) covers the larger proportion.

The total logistics cost as percentage of the sales differs with product categories. For low unit value mass distributed products, the logistics cost may be 30–40 per cent of the sales value, which in the case of high value engineering items may not exceed 5–8 per cent. With proper systems and controls, the logistical cost, which will be ultimately loaded on to the product and borne by the customer, can be reduced, and the benefits can be passed on to the customer by way of value addition through a combination of price, quality, and service.

 

Table 1.2 Distribution of Logistics Cost

Stages	Cost items	Percentage
Inbound logistics	Transportation Storage Inventory	12.0 8.0 8.0
Process logistics	Transportation Storage	2.0 5.0
Outbound logistics	Transportation Storage Inventory Order Processing	33.0 15.5 6.5 10.0

1.6 LOGISTICS FUNCTIONS

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 organization. The major logistical functions are shown in Figure 1.2.

Order Processing

It is an important task in 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 agreed. 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 material is received by the customer. The order processing activity consists of the following steps:

• Order checking for any deviations in agreed-upon or negotiated terms
• Prices, payment, and delivery terms
• Checking the availability of materials in stocks
• Production and material scheduling for shortages
• Acknowledging the order indicating deviations, if any

The above process consumes more time if paperwork is involved. If the processing of the order is slow and complicated, it will have a direct effect on the delivery period committed. It may increase the transportation cost in order to deliver the material faster to compensate for the delays in the order processing operation.

Order processing is a routine operation but requires a great deal of planning, training of people involved, and investment in the system to bring efficiency and accuracy to it. In a large organization where thousands of orders are received each day, it becomes impossible to manually register the order and process the order quickly and correctly. In such a situation, a system capable of handling such voluminous work with minimum or no human involvement is a necessity. In addition, due to competitive pressure, the order fulfilment cycle has to be shortened to have an edge over the rival firms for retaining the customers. The only solution is to devise an order processing system ensuring efficiency and accuracy, but with minimal investment costs.

Inventory Management

Inventory management is to keep enough inventory stocks to meet customer requirements, and simultaneously its carrying cost should be the 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 pilferages. The average cost of carrying inventory varies from 10 to 25 per cent of the total inventory per year depending on the products. In the case of perishable products, it is on the higher side. Even though inventory is a major concern, without it a firm cannot meet the regular and timely product requirements of its customers.

There are two approaches to inventory management: one is cost approach and the other is customer satisfaction. Business firms try to strike a balance between the two. Due to advance communications and computing facilities, some business firms in business-to-business (B2B) markets are operating on a zero-inventory level by adopting the JIT (just-in-time) technique. But this is possible with co-partnership between the purchaser and the supplier, and they communicate on a real-time basis.

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 a switching facility rather than a storage place. It is a major cost centre, and many problems at the customer end are directly a result of improper warehousing management. Warehousing is the key decision area in logistics. The major decisions in warehousing are:

• Location of warehousing facilities
• Number of warehouses
• Size of the warehouse
• Warehouse layout
• Design of the building
• Ownership of the warehouse

Warehousing is an important component of logistics as it is directly linked to the ability of a firm to deliver the desired level of customer service. The ownership of a warehouse is private, public, or contractual. Each has advantages and disadvantages associated with it, and a firm has to choose the best options depending on its objectives and the resources available. However, the decision on warehousing requires proper planning and analysis, as well as help from experts in real estate, industrial engineering, and operations research.

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 complete till the goods are physically moved to the customer’s place. The physical movement of goods is through various transportation modes. For low unit value products, the transportation cost component is 20 per cent of the product cost. In logistics costs, its share varies from 65 to 70 per cent 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 goods at the customer end overrides the cost consideration, and the goods are sent through the fastest mode, which is an expensive alternative.

The consideration of whether the firm should have its own fleet or go in for outsourcing depends on investment, operating costs, expertise, and reliability. The common modes available are road carriers, railways, airways, ships, pipelines, and ropeways. Depending on the customer requirements and the availability of transportation infrastructure and its reach and cost, firms decide on the mode with an optimum cost under the given product-market conditions.

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.

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, ease in material handling, and storage space economy. The unitization of load has a major bearing on logistical packaging with regard to the packaging cost.

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 in logistics is helping business firms to enhance their competitiveness.

1.7 LOGISTICS FOR BUSINESS EXCELLENCE

Logistics is an information-based process of material movement from a supplier to the manufacturer and to the customers. Hence, for business excellence, logistics operations need to be integrated on the following two fronts:

1. Integration of logistics into the business
2. Integration of components of logistics

Any business process consists of a set of activities that include raw material procurement, conversion, and the distribution of finished products for selling. To accomplish the objective of making available the right product at the right place and at the right time with less cost, the help of another process called logistics is needed to take care of the material storage and movement across three stages of a business process. The objectives of the business will not be achieved unless logistics is integrated into the business process. The integration will make the business process run as a chain rather than isolated process elements. The logistics process is a set consisting of a number of activities, including warehousing, material handling, storage, packaging, transportation, and information flow (see Figure 1.3).

For a logistics operation to run smoothly, proper integration among the components of the logistics process is imperative. The efficiency and effectiveness of the entire system depend on how individual elements get coordinated and work as a system and not as functional silos.

In an integrated logistics process, a close coordination between inventory flow and information flow is essential for system efficiency and effectiveness. For a manufacturer, the inventory flow starts after the material is shipped from a supplier to the processing or manufacturing centre and ends with the delivery of the finished product to the customer or user. In the case of a retailer, the logistics process starts after the material is dispatched from the manufacturer or wholesaler and ends with final delivery to the user. The volume of logistical activities varies with the width of the supply chain, the product category, and the volume of the business.

In a business process, there is continuous value addition at each stage of inventory transformation until it is finally delivered to the customer. Logistics supports the value creation process and hence it requires continuous attention of the management. For the focused attention, logistics activities can broadly be divided into three areas of business operations wherein the logistics needs are quite different.

Procurement

It is also known as buying or purchasing activity. The material movement from suppliers to the buyer comes under the purview of inbound logistics. The raw material, components, parts, and consumables required for manufacturing operations should be available at the plant at the start of production schedules. The logistics activities include transportation and storage. The focus here is on a timely movement of the goods in an economic load size for transportation. Procurement is concerned with availability of desired material for the manufacturing in the right quantity. To save on the inventory carrying costs, the frequent but small lot sizes are planned. However, with an increased transportation frequency, the freight charges may go up, which may be offset by savings on inventory carrying costs.

Processing

The logistics operation in manufacturing is concerned with movement of in-process or work-in-progress inventory. Logistics here helps in preparing production scheduling. It is concerned with availability of inventory for the products to be manufactured, the places where they are manufactured, and the timings when they are manufactured. For example, the sub-assemblies for the truck will be manufactured at the decentralized locations from where these have to be brought to the main plant for carrying out the main truck assembly. The process logistics here takes care of the movement of the right parts and components to the respective sub-assembly plants and from there to the main assembly plant as and when required per the production schedules. Process logistics takes care of the movement of inventory for requirements of the internal customer where the degree of uncertainty is very low because the manufacturing operations are under the control of management.

Distribution

The movement of finished goods from a manufacturing plant to the customer or user comes under the purview of outbound logistics. The availability of material at the point of sale and the time it is required by the customer is vital for an enterprise to encash the opportunity. The material may be required at various places in the distribution channels. The requirement of each of the channel members may be different in terms of quantity, product variety, frequency of delivery, transportation, and so on. The outbound logistics ensures movement of the material per the requirements at the right place and at the right time, but with the minimum cost.

The logistical activities at three places—procurement, processing, and distribution—in a supply chain overlap, but the requirements are different. Hence, the prime goal of the integrated logistics should be to coordinate the inventory movement across the supply chain for system effectiveness and efficiency to gain a competitive advantage.

1.8 LOGISTICS MANAGEMENT—OBJECTIVES

The primary objective of a logistics system is to move the inventory in a supply chain effectively and efficiently to extend the desired level of customer service at the least cost. To achieve this, the following subsets of the above broader objective need to be achieved:

Inventory Reduction

Inventory is the biggest culprit in adversely affecting the bottom line of an enterprise. Through a financial accountancy perspective, inventory is an asset and does not cause any appreciable disadvantage even when it is stocked in an excess quantity. Traditionally, firms have carried an excess of inventory for the purpose of extending excellent customer service. However, inventory as an asset requires investment to possess it. The funds invested are blocked and cannot be used for any other productive purpose. Moreover, there is a capital cost associated with it. The carrying cost will be equivalent to the interest on the funds at the bank borrowing rates currently applicable. The carrying cost will be drained on the enterprise profits. Hence, the prime objective of logistics is to maintain the inventory at the minimum level. However, the customer service goal can be managed through small, but frequent supplies. A higher transportation cost will be much lower than the inventory carrying cost resulting in better margins.

Reliable and Consistent Delivery Performance

On-time delivery is crucial to the customer to maintain his production schedule. The customer is not interested in a faster delivery of the material ahead of production schedule. This area of operation is subject to variance. However, proper planning on transportation modes and inventory availability along with a variation factor will reduce the variance. The other objective of logistics should be consistency in delivery performance; this will help build customer confidence for keeping a long-term relationship.

Freight Economy

Freight is a major cost element in logistics cost. This can be reduced by adopting measures such as freight consolidation, transport mode selection, route planning, load unitizing, and long distance shipments.

Minimum Product Damages

Product damages add to the logistics cost. The reason for product damages are improper logistical packaging, frequent consignment handling, absence of load unitizing, and so on. Use of mechanized material handling equipment, load unitization, and proper logistical packaging will reduce the product damages.

Quick Response

This is related to the capability of a firm to extend the service to the customer in the shortest time frame. Use of the latest technologies in information processing and communications will enhance the decision-making capability in terms of accuracy and time, enabling the enterprise to be flexible enough to fulfil the customer requirements in volumes and varieties in the shortest time frame. For example, smaller shipments could be delivered rapidly at the point of consumption.

1.9 LOGISTICS SOLUTION

Traditionally, manufacturing organizations used to have their in-house logistics departments taking care of all aspects of logistics from the source of raw materials to the delivery of finished products to the customer. But logistics is not the area of core competency of manufacturing or trading organizations. Hence, this job needs to be handed over to somebody whose core competency is logistics, and that individual can do the job with effectiveness and efficiency due to his/her expertise with a cost less than that of the competition. Today, successful business corporations across the world are outsourcing logistics to third party logistics service providers, who have the necessary infrastructure and expertise to do the job in a cost-effective manner. They provide complete logistics solutions to the manufacturers and traders for integrating various operations of logistics for a speedy and uniform movement of material across the supply chain.

There are some organizations from the transportation segment offering timely freight services across the length of the country. The other segment is warehouse service providers. The clearing and forwarding agents have the expertise in handling export and import cargo and customs formalities. All these segments have their expertise in their individual areas of operation, but lack the ability to deliver a holistic solution. The task of integrating these various arms of logistics to provide a comprehensive service from a single window is known as logistics solution. The solution may be customized for products, pickup, and delivery locations; volumes to be handled; and formalities to be completed. A single unit, which can handle all the logistics segments in a seamless fashion to provide a hassle free logistics service to the clients, can provide a complete logistics solution.

Today, logistics is widely used in virtually every area and can form the basis for a domestic kitchen inventory on one extreme to complex activities in manufacturing a luxury car within a prescribed time frame with stipulated specifications on the other. The success of a logistics service-providing company depends on the conceptualization and implementation of logistics solutions, tuning to the needs of the customer.

1.10 LOGISTICS FUTURE

Today corporations are looking for a sustainable competitive advantage not for growth alone for but also for survival. The killing competition is compelling corporations to review their business processes to deliver the products and services to the customers, who are more demanding and looking for the value for money they are spending. Today competition has shifted from product to supply chains. Supply chain management is an organizational concept whose primary objective is to proactively manage a two-way movement and coordination of goods, service, and information from raw material suppliers to the end customers. A supply chain is a close link between procurement, manufacturing and distribution. This link is weaved into a seamless chain with one thread called logistics. The coordination of material and information movement across a supply chain is possible with integrated logistics. Today logistics management is based on the system concepts and cost approach. The efficiency and effectiveness in material and information movement are possible only with integrated logistics operations. Logistics activities such as transportation, warehousing, material handling, inventory management and order processing have a significant impact on customer cost and operations. An inefficient logistics operation may force customers to carry more inventories resulting in a burden on their profit margins. The integrated logistics helps take cost out of the supply chain and enhance the customer service level. Logistics is an important sub-system of the supply chain. It facilitates the continuous material movement at a reduced cost to make the right product available at the right place and at the right time at the minimum cost.

At a macro level, growth of a country’s economy depends on the availability of an excellent logistics infrastructure. Speed of goods movement greatly depends on the road and rail networks across the length and breadth of the country and the load bearing capacities of the national and state highways to carry heavy cargos. The air links and port terminal facilities are equally important for boosting export trade.

The Internet and communications technologies have made the entire world a global village. Due to globalization and emergence of the WTO regime, buying and selling activities have become more competitive and have crossed national boundaries. Material movements need to be speedy, reliable, and consistent in a cross-border business exchange process. It is virtually inconceivable in today’s economy for a firm to function without efficient and effective logistics. It will not be an exaggeration to call logistics the backbone of a county’s economy at both macro and micro levels. In the future, logistics will assume a greater role in using scarce resources judiciously and in releasing them for a more productive usage to improve the margins. Logistics no doubt has a great future, and it is at the centre of world trade.

In Indian context, due to liberalization of the economy, trade and commerce activities have witnessed a manifold increase. Many foreign multinational firms have started trading activities on Indian soils. They have outsourced their distribution activities to logistics firms. Even among Indian companies, logistics outsourcing has become an accepted trend for the following reasons:

• Cost saving
• Focus on core business
• Paucity of funds
• Reduction in liabilities
• Wider geographical coverage
• Cross-pollination of better available practices.

The future of logistics in India is very bright provided the issues such as abolition of octroi levy, rationalization of customs formalities, privatization of ports, improvement in road and rail infrastructure, creation of modern warehouse facilities on scale economics, and creating cold chain infrastructure are taken care of through government initiatives with proper policy formulations. With implementation of the WTO directives, logistics services will be in great demand in the future. This is evident from the fact that third party logistics service providers have proliferated in India after the economic liberalization in 1991. Fast Moving Consumer Goods (FMCG), consumer durables, retail chains, food processing, pharmaceuticals, electronic goods, and automobile industries are major drivers to logistics activities in India.

India is geographically well positioned to emerge as the single largest sourcing hub for a wide range of products—lifestyle, pharmaceuticals, chemicals, intermediates, perishables, machinery, and automobile spare parts to mention a few. There are huge opportunities for Indian exporters and logistics service providers to explore the benefits from the close relationship that augers well for both. At a macro level, India is spending 13 per cent of its GDP (India’s GDP at Rs 46,93,6.02 billion—USD 1173 bn—during 2007–08, as per the Economic Survey for 2007–08 presented in Parliament by the Finance Minister) on logistics. The planned growth of 6 per cent per annum in GDP, in the eighth Five Year Plan, speaks of the future scope of logistics and the role it has to play in years to come in the Indian economy.

SUMMARY

Logistics is basically an information-based process of optimizing material flow in an enterprise from suppliers to the manufacturing plant and finally to the customers through a physical distribution system. It spans three functional areas of the business enterprise, viz. procurement, manufacturing, and distribution. Logistics management is used as a means to maintain and improve the profitability of a manufacturing enterprise. At a macro level, it has a greater role to play in a country’s economy. The logistical cost as a percentage of the GDP varies from 10 to 15 per cent in the developed economies of the world. At a micro level, logistics is a bridge between the customer demand and the physical supply. Hence, any productivity improvement in a logistics system reduces the operating costs and releases the resource for deployment in other productive purposes. Today logistics is viewed as the system concept of material flow from the source of supply through manufacturing to the final point of consumption. Logistics covers the functions such as order processing, warehousing, inventory control, transportation, packaging and information flow. Logistics management is concerned with an integration of the above functions to get system efficiency and effectiveness in material flow across the business process to ensure time and place utility of the product to the consumer. Today logistics is used as a tool for developing the competitive advantage. To achieve this major objective, any logistical system should focus on inventory reduction, quick response, minimum product damages, reliable and consistence delivery performance, minimum deviations and freight economy. Integrated logistics helps effective deployment of available resources. It enhances system productivity, which ultimately contributes to the profitability of the enterprise and results in a dramatic improvement in return on investment (ROI). With liberalization of the Indian economy, the trade and commerce activities have witnessed a manifold increase leading to a competitive pressure on the business organizations. To counter competition, business firms are finding ways to develop a competitive edge. They are using logistics to provide a superior customer service and gain a competitive edge. The logistics as a service industry has a great future in India. Major drivers to the growth of logistics industry in India are FMCG, food processing, automobile, retail chains, consumer durables, electronics and pharmaceutical and lifestyle industries.

REVIEW QUESTIONS

1. “Logistics is a key to success of the supply chain of a business firm.” Explain.
2. Discuss the role of logistics in a customer value delivery chain.
3. How is logistics used for gaining a competitive advantage to deliver a superior customer service?
4. Discuss the relevance of various components of logistics in a lean supply chain.
5. Discuss the importance of logistics at macro and micro levels.

INTERNET EXERCISES

1. Through secondary research (http://en.wikipedia.org) find out the features of
   1. medical logistics,
   2. space logistics, and
   3. military logistics.
2. Refer to the Web site http://sical.in, and find out how Sical Logistics Ltd are providing logistics solutions to their clients.

BIBLIOGRAPHY

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