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Role of Logistics in Supply Chain

“Most skills and competencies needed to excel in logistics and supply-chain management are the same skills and competencies needed to excel at disaster relief operations

 

—Matt Waller”

INTRODUCTION

Logistics fills the gap between supply and demand. However, when the gaps tend to be larger and the risk of dilution of service level is higher, there arises a need for an integrated system to make the product and information flow seamless. Supply chain management is the process of integration to bridge the gap between supply and demand. The supply chain tries to understand the demand signals and the profile of the target customer base and adjust itself for planning and execution of the customer requirements with the desired service level.

The efficiency and effectiveness of inventory movement across the supply chain is greatly dependent on the capability of the logistics management. Hence, the integration of supply chain is not possible without the capability and reliability of logistics operation. Cost reduction and customer satisfaction are not possible in the supply chain without efficient logistics operations like warehousing, material handling, inventory control, packaging and transportation. In fact, logistics and the supply chain management cannot be separated from each other and they are part of the same customer service solution. Logistics operations may continue irrespective of whether enterprises follow the supply chain philosophy or not. The inventory movement needs to take place in order to bridge the gap between supply and demand. Efficient logistics management takes care of the gap, and their effectiveness depends on the enablers. In other words, the success of the supply chain depends to a great extent on logistics. However, for logistics and supply chain to be successful, the following need to be planned and managed properly:

• Close coordination with the suppliers
• Reduction of inventory levels
• Speed, reliability and consistency in inventory movement
• Faster replenishment cycle
• Shorter performance cycle
• Flexible manufacturing cycle
• Asset utilization and productivity
• Innovations for value additions in customer service offerings

In a nutshell, logistics is a key to the success of supply chain management. The degree of success depends on the level of integration between them using the enablers like information and communication technology. In the new millennium, globalization is making more and more national economies integrated into global economy, world trade is expanding at an exponential rate, technologies are advancing and becoming integrating forces, customers are demanding value for their money, marketers are experiencing competitive pressure and businesses are struggling not only for growth but also for survival. 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 squeezing out unproductive time and cost from the supply chain cycle. These trends have resulted in numerous marketing, distribution and logistics opportunities across the global markets through expanded global supply chains and enhanced competitiveness.

DEFINING LOGISTICS

In the olden days, logistics was referred to as the art of moving the army and supplies thereof. The origin of logistics can be traced to the Greek word ‘logistikos’ and the Latin word ‘logisticus’. Both words mean ‘the science of computing and calculating’. In recent times, the word ‘logistics’ was first used in the seventeenth century by the French army. However, logistics gained importance in army operations during the Second World War for the movement of supplies, men and equipment to the war front. The US army officially started using ‘logistics’ after the Second World War. Today logistics is used in business for movement of inventory from vendors to the manufacturers and finally the finished products to the consumers.

According to the American Council of Logistics Management, ¹ logistics is defined as follows:

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.

Philip Kotler² defines logistics as follows:

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.

Logistics is a supply chain enabler coordinating the inventory movement process by optimizing the flow of materials and supplies through the business operations to finally reaching to the customers.

Martin Christopher³ defines logistics as follows:

Logistics is essentially a planning process and an information based activity.

Philip Scary has the following definition:

The corporate traffic cop that directs flow of material from source through production and distribution to the final customer.

The function of logistics ultimately supports corporate goals by delivering products to the consumer at a time and place of his choice, at an affordable cost.

There is a marked difference between ‘logistics’ and ‘supply chain’. However, many times these two words are used synonymously. Logistics is a physical bond to achieve free flow of inventory, information and cash. As opposed to this, ‘supply chain’ is an emotional bond which develops capacity in the chain to allow this flow. Logistics is a bundle of activities which gets integrated in the supply chain process. It ensures cost-effectiveness, and creates competitiveness through supply chain management.

It is important for an organization to have a streamlined process to deliver products and services to the customers. The effective and efficient physical movement of the tangible product will speak about the intangible services associated with it and about the organization which is delivering it. In 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 for the growth of trade and commerce activity in the country. At a macro level, logistical infrastructure such as modes of transportation, transportation equipment, storage facilities, connectivity and information processing contribute to a large extent in the physical movement of goods produced in various sectors such as manufacturing, mining and agriculture. The speed and reliability in distribution from place of production to place of consumption will contribute to a great extent to the growth of a country's domestic and international trade.

At a micro level, logistics has a great role to play in delivering value-added services to the customer by providing differentiated services. The major objective of logistics management is to achieve the desired level of 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. The improvement in productivity achieved in any part of logistics systems would help in cost reduction and optimum usage of resources for productive purpose.

Logistics integrates activities of material movement across business processes that are interdependent and need close coordination. It covers the following functional areas, and is termed as ‘Logistics Mix’⁴ by Martin Christopher:

• 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 ensure the flow of material across the supply chain cost-effectively and making available the product at the right place and at the right time. Logistics has to achieve two opposite goals: customer satisfaction and cost-effectiveness.

According to Michel Porter, businesses gain a competitive edge either by reducing their cost or by offering differentiated products and services. The cost can be reduced by effective logistics management, which will also enhance the differentiation through superior customer service. As shown in Figure 2.1, the value-acquiring activities of the firm can be categorized into inbound logistics, in-process logistics and outbound logistics.

 

 

Logistics delivers the value to the customer through the following three stages in the supply chain:

• Inbound logistics: Includes movement of raw materials and components for processing from suppliers.
• In-process logistics: Includes storage and movement of raw materials and components within the manufacturing premises as per the manufacturing schedules.
• Outbound logistics: Includes the warehousing, transportation and inventory management and distribution of finished products to customers.

The total logistics cost as percentage of the sales differs with the categories of products. With proper control, the logistical cost can be reduced by way of value addition through a combination of price, quality and service.

GOALS OF LOGISTICS

The mission of the logistical system is to effectively and efficiently move the inventory in supply chain so as to extend desired level of customer service at the least cost. The key elements of effective logistics which are core to supply chain management are as follows:

• Product movement
• Information movement
• Time and service
• Cost
• Internal integration

Supply chain management requires logistics support so as to meet customer demands. To meet these demands, organizations need to be flexible both internally and externally, need to develop teamwork to meet the organizational objectives and need to make use of technology to manage the requirements. The inefficiencies in supply chain are due to excess inventories and high costs in buying and moving the inventory. The following are subsets of logistics objectives under its broader objectives of cost reduction and customer satisfaction through service.

Responsiveness

Responsiveness refers to the capability of the organization to quickly respond to market changes and customer demands by way of extending services in the shortest time period. The latest technologies in information collection, processing and communication enhance the degree of responsiveness in terms of accuracy, timing and flexibility to fulfil customer requirements, irrespective of the volume and variety, in the shortest possible time period. For example, the supplier can deliver small-size consignments rapidly and frequently at consumption points.

Reducing Inventory Burden

Inventory in the supply chain adversely affects the bottom line of the business. Generally, organizations carry excess inventory for the purpose of providing excellent customer service. The funds invested in inventory are blocked and cannot be used for any other productive purpose. There is always capital cost associated with inventory. The cost of carrying inventory is equated to the interest rates on the funds loaned by the banks at that time. The carrying cost is a drain on the profit of the enterprise. Hence, the major objective of logistics is to maintain the inventory at a minimum level to keep the inventory carrying cost lower. With frequent and small size supplies, the customer service goal can be managed effectively. In such cases, the higher transportation cost will be offset by the inventory carrying cost which is much higher. This, in turn, enhances the profit margins.

Delivery Reliability and Consistency

The customer will always prefer on-time delivery, which is crucial to keep his production schedule on. The delivery ahead or beyond of agreed dates will spoil their relations with the customers. Faster delivery will increase inventory level at the customer end because he has to organize payments in advance. Late delivery will disturb his production schedules. However, as a result of proper planning, transportation modes and inventory availability will reduce the variance. In addition, the other important objective of logistics is consistency in delivery performance which will help in building customer confidence for keeping long-term relationship.

Lowering Freight Cost

In logistics, freight cost is the major contributor. The control measures to reduce freight cost are freight consolidation, selection of transport mode, route planning, load unitizing and long-distance shipments.

Minimum Transit Damages

Products may get damaged due to improper logistical packaging, absence of load unitizing and frequent handling of consignments. All this adds to the logistical cost. The solution is to use mechanized material handling equipment and suitable logistical packaging.

FUNCTIONS OF LOGISTICS

Logistics is an information-based activity involving movement of goods in the supply chain, mostly from suppliers to customers via manufacturing. However, this activity covers a variety of functions, which need to be managed properly in order to ensure effectiveness and efficiency in the supply chain of the enterprise. The logistical functions are shown in Figure 2.2.

 

Order Processing

The purchase order placed by the buyer on the supplier is the base document to effect transaction between the two parties. This document covers details of the product (specifications) to be supplied, price, delivery period, payment terms, taxes and other commercial terms as negotiated and agreed. This document is processed further to make the ordered goods available to the customer at the right time and the place of his choice. The order processing activity includes the following steps:

• Checking the order (against the agreed or negotiated terms)
• Prices, payment and delivery terms
• Checking the availability of materials in stocks
• Production and material scheduling if stocks are not available
• Acknowledging the order indicating deviations, if any

The order processing time will have a direct effect on the committed delivery period and cost of transportation. The transportation cost to deliver the material fast will be higher so as to compensate for the time lapsed at the order processing stage.

In large-sized organizations where thousands of orders are received per day, the manual processing of the orders will create time delays and lot of errors. To avoid this, automated systems are always preferred. An electronic or IT-based system will register and process the order quickly and correctly.

Controlling Flow of Inventory

This function has two opposite goals. The first one is to keep enough inventory stocks to meet customer requirements; the second one is to keep the inventory carrying cost at a minimum. This exercise is to strike a balance between not losing market opportunity and not to increase the inventory cost so as to meet the same. The inventory carrying cost indirectly eats away the profits. The inventory carrying cost consists of cost of financing the inventory, insurance, storage, losses, damages and pilferages. In general, depending on the type of product, the average cost of carrying the inventory varies from 10 to 25 per cent of the total inventory per year. In case of perishable products, it is on the higher side.

To manage inventory there are two approaches. The first one is cost approach and other is customer satisfaction. Organizations try to strike a balance between the two. Companies adopt different strategies such as operating on zero inventory level by adopting JIT (Just-in-time) technique. But this is only possible with co-partnership between the purchaser and the supplier and communication between them on a real-time basis.

Storage or Warehousing

Warehousing is required because the demand-supply cycles never match. The inventory is kept in a warehouse till the order is received. Warehousing plays an important role in logistics operations of the organization. Warehousing can be used as a tool for competitive advantage. The effectiveness of the marketing strategies is often based on the decision of the warehousing. Warehousing is not merely a storage place in today's context; it is treated as a switching facility in logistics network. The delays in delivery of finished goods are an outcome of inefficient warehousing management. Therefore, warehousing is an important decision area in logistics. The major decision areas with regards to warehousing are as follows:

• Location of warehousing facilities
• Number of warehouses
• Size of warehouses
• Layout of warehouses
• Design of the building
• Type of warehouses (private, public or contractual)

The warehousing capability exhibits the ability of the firm to deliver a desired level of service to the customer. The ownership of the warehouse is private, public or contractual, and after looking into the advantages and disadvantages associated with each one of them, the organization has to decide on the best option. The decision will be based on the objectives of the business and the resources available.

Transportation

Transportation is at the heart of logistics. Transportation makes the movement of inventory happen from the supplier to the customer. Transportation refers to the the physical movement of goods to the customers by using the various transportation modes available. The transportation cost as percentage of product price varies with the unit price of the product. For products with low unit price value, it is 20 per cent of the product price. In some cases, logistics costs varies up to 50 per cent such as in the case of mass-market products like salt.

Transportation modes are chosen by the company depending on the availability, reach and freight cost. Cost is the most important factor in the selection of a particular transport mode. However, under exceptional circumstances timely delivery of goods overrides cost considerations and the goods are sent through the fastest mode—although this is an expensive alternative.

In today's context, transportation being a non-core activity, firms generally do not own fleet but go in for outsourcing. The consideration may be based on initial investment, maintenance cost and the freight. Finally, depending on customer requirements, availability of transportation, infrastructure and its reach, and cost, firms decide on the mode with optimum cost under the given product-market conditions.

Material Handling and Storage System

Material handling plays a crucial role in speeding up of the inventory movement across the supply chain. Non-availability of proper material handling methods or equipment will add to product damages and delays in deliveries and incidental overheads. The productivity in logistics system can be enhanced by using mechanisation or automation in material handling equipments system. The other considerations for the selection of material handling systems are the volumes to be handled, the speed required for material movement and the level of service to be offered to the customer.

Storage system is important for maximum space utilization (floor and vertical) 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

The packaging used to withstand varying conditions of warehousing, transportation and handling is called logistical packaging. It plays an important role in damage protection, ease in material handling and saves storage space. In logistical packaging, ‘load unitization’ has a major role to play to economize the packaging cost.

Information

Logistics is an information-based activity of goods movement across the supply chain. Information system plays an important role in delivering superior service to customers by way of delivering the right product at the right place and at the right time. The use of IT tools for information flow support logistics and also enhances its competitiveness.

BUSINESS PROCESSES IMPACTED BY LOGISTICS

Logistics encompasses almost all areas of management. It deals with movements of inventory, information and also cash. The decision in logistics has implications in many management areas. The areas covered are product development, customer service, inventory management, transportation, warehousing, information systems and material handling. Ultimately, logistics is a supply chain enabler to achieve cost effectiveness and customer satisfaction. The following are the areas where logistics is vital to the success of supply chain operations:

Customer Order Fulfilment

Order fulfilment involves closing the customer order as per the terms and conditions negotiated and accepted by both the buyer and the seller. The order fulfilment is a process originating from suppliers and ending with customer via the company's manufacturing plant. The order fulfilment process includes traditional logistics activities such as filling and delivering orders, and it is the function of logistics that contributes resources to perform these activities. Logistics as a service function greatly contributes to the value created for customers by the order fulfilment process. Today technology such as WMS, EDI, TMS and RFID are being used to enhance the effectiveness and efficiency of the order fulfilment process.

Manufacturing Flexibility

In-process logistics management deals with the flow of inventory to and between manufacturing facilities of the company. To meet the market demand, the manufacturing activities of the firm should coordinate with its suppliers with the help of logistics. The degree of manufacturing flexibility in the supply chain is decided by the logistic capabilities of the firm. If the company wants to be truly flexible and if the degree of manufacturing is large, the organization will require appropriate logistics capabilities which should be implemented and managed accordingly. Logistics capabilities that fall short create hindrance in manufacturing flexibility. For example, for ‘postponement strategy’ the organization should have manufacturing flexibility and appropriate logistical capability to handle the customer service. For inventory decoupling points in postponement strategy what is required is trade-off analysis that includes manufacturing flexibility, logistics capabilities and costs.

Product Development Process

A new product development process requires close coordination with material suppliers, R&D and the key customers. Here the material flow is from the suppliers to customers via the company's Rf&D and pilot plant. The logistics process enables management to coordinate the efficient flow of ingredients and finally new products across the supply chain. Logistics plays an important role in the development of new products. In today's context, the product development process needs to be completed in a very short time frame. The new product should reach the market with speed to have the first mover advantage. All the elements of logistics such as transportation, warehousing, material handling and packaging are involved in the product development process. Logistics costs associated with sourcing, manufacturing and distribution of new products needs to be assessed for product profitability. Logistics plays a key role in successful product introduction after it is commercialized. It helps in product availability during the early stages of the life-cycle of products.

Reverse Logistics

In general, organizations design their supply chain for forward (flow from manufacturer to the end user) flow of goods. Most of the manufacturers forget their product responsibility after it is delivered to the customer. The manufacturers consider that their responsibility is limited to the extent of replacement of defective products covered under warranty period or products damaged during transit. They do not think about the used materials, left out materials, packaging waste or disposable wastes. The packaging waste and leftover material cause environmental pollution. Due to growing consumerism and concern about environment in the developed countries, they have regulations on the product wastages. They have passed legislation asking the manufacturers to take care of products discarded by their customers after usage. Many leading companies are taking this as an opportunity to develop competitive advantage. They are setting up system for reverse material flow. They are designing supply chains to take care of both forward and reverse flow of material. Reverse Logistics is becoming an integral component of retailers’ and manufacturers’ profitability and competitive position.

Logistics pays a major role in reverse flow of materials. Reverse logistics network can be used for various purposes such as refilling, repairs, refurbishing and remanufacturing. BMW (German automaker) has installed a factory to dismantle the used cars and dispose of the parts and components for recycling and refurbishing. They have established a system for taking back used cars from customers through the car dealers. In Germany, the FMCG companies have come together and established a system to take back the packaging wastes from the customers through the retail chains. Logistics plays a vital role in reusing of packaging material in industries such as soft drinks, wines, oil and LPG distribution. Reverse logistics is integrated to their regular supply chain because of the reusable nature of the packages such as glass bottles, tin containers and metal cylinders. No extra transportation costs are involved in the process as the delivery van originates and terminates its journey at factory where these reusable bottles are refilled for re-delivery to the customers. The arrangement is like the hub and spoke distribution system. For consumer durables, the manufacturers establish the reverse logistics system not only for offering the free service during warranty period of the product, but also for extending the services beyond the warranty period on a chargeable basis. The other important area for reverse logistics is product recall in an emergency situation wherein the products distributed in the markets are called back to the factory due to various reasons. These may be: quality complaints, warranty claims, product not giving the guaranteed performance, product causing harm to human life, products crossing the expiry date, defective design to save the company image. In general, companies do not have reverse logistics system designed in advance. But, many firms have shown great deal of organizing ability to mobilize company's resource so as to achieve time-bound objectives. Business firms have always a forward logistics network in place. But they have to create reverse logistics network to take care of backward movement of used, unwanted, discarded and damaged goods. However, forward logistics provide the data and analytical skills necessary for performing a network analysis associated with the reverse flow.

Customer Relationship

Customer relations are developed by extending value added service to the customers. The decisions on customer relationships management are critical to the firm's success at any point of time. Management categorizes their customers based on their value over time and designs products and services to increase customer loyalty. The logistics function contributes to the customer relationship management process by providing tailor-made and value added services to key customers and channel members. The cost and revenue potential of each deliverable needs to be estimated in advance and suitable logistics service components are offered to each customer depending on their strategic importance and value. Logistics is an important source of competitive advantage and hence differentiating logistics capabilities needs to be identified to avail of the market opportunities and to develop continued customer relationships.

Supplier Relationship

A company needs to develop strong relationships with key suppliers, and manage transactional relationships with them. Logistics cost has an impact on the total cost of purchased materials. The procurement cost includes logistics costs which covers the expenses on transportation, inventory carrying, ordering, receiving and quality control. In addition, there will be a cost associated with service failures from suppliers. Thus, logistics plays a role in deciding the delivery performance of the suppliers. With the appropriate logistics strategy, there is great scope for improvement of supplier's performance and maintain good relationships with key suppliers. For superior performance on input side firms need excellent suppliers' capabilities with lower costs implications. Appropriate logistics involvement contributes to cost savings in procurement to the vendors' satisfaction.

Customer Service

Logistics is an activity impacting the customer service. For sellers to remain competitive it is necessary to respond to customer requests with speed. The delivery of orders to the customers at the right time and place is a responsibility of the logistics function. However, this requires visibility in logistics, which depends on information systems for tracking product flow, detecting deviations and correcting the errors in failure of service. Hence, logistics capabilities of the organization should be considered, while designing appropriate response strategy for each standardized event to extend differentiated customer service. Regardless of the type of events, logistics frequently is involved in service-recovery operation. The examples are handling non-standard order, speeding of trans-shipping. Hence, by involving logistics in the customer service delivery process, the customer satisfaction can be gained even into fewer exceptions, emergency situations and faster error recovery.

Managing the Demand

The demand management process covers activities such as forecasting, synchronizing supplies, reducing demand variability, managing supply chain flexibility and developing contingency plans to take care of interruptions to supply or unexpected changes in demand. Logistics play an important role in the demand management process. It provides input to the forecasting process. Logistics communicates current inventory levels, existing logistics capabilities, and any known system constraints. Logistics also provides input on cost and recovery alternatives when products are in short supplies and requires allocations.

LOGISTICS DECISION HIERARCHY

The decisions in logistics impact the supply chain efficiency and effectiveness. The decisions in logistics are taken at four levels as shown in Figure 2.3.

 

 

The strategic level decisions are based on the services the firms are going to provide to the customers. For example, a pizza company may offer ‘30 Minutes Pizza’ or ‘Available 24×365’. To cater to these service levels the firm will have to design the distribution network so as to have access to the markets and customers. This includes the decisions on locations of distribution centres, network of channel members to ensure the proximity of supply points to demand points. The third one is the decisions on functional areas of logistics, that is, warehousing (size, storage facility, material handling equipments and so on), transportation (freight consolidation, transportation mode, freight charges, route planning and so on) and materials management. The last one is the implementation phase, that is, who will do it? And how they will do it? Hence, in the organization culture, employee training and motivation are the critical areas in this phase. The areas in implementations phase are decisions regarding equipments and facilities, information flow procedures and policies to run the show.

LOGISTICS IN THE INDIAN CONTEXT

At present, ‘outsourced logistics’ accounts for only one-third of the total logistics market in India, which is a significantly lower proportion vis-a-vis the developed markets. Growth in this industry in India is currently being driven by over $300 billion worth of infrastructure investments, phased introduction of VAT, the development of organized retail and agro-processing industries, along with a strong manufacturing growth. In addition, strong foreign direct investment inflows expected in the Indian markets, would lead to increased market opportunities for providers of logistics services in India. The primary growth drivers of this industry are as follows:

• Investments in the infrastructure sector: Government activities ranging from building of Golden Quadrilateral to roads and bridges in rural India has sent a wave of positive sentiment in the industry.
• Streamlining of the indirect tax structure: The introduction of value added tax (VAT) and the proposed introduction of a singular goods and services tax (GST) are expected to significantly reduce the number of warehouses. Manufacturers are required to maintain warehouses in different states, thereby resulting in a substantial increase in demand for integrated logistics solutions.
• Robust trade growth: Strong economic growth and liberalization have led to considerable increase in domestic and international trade volumes over the past 5 years. Consequently, the requirement for transportation, handling and warehousing is growing at a robust pace and is driving the demand for integrated logistics solutions.
• Globalization of manufacturing systems: Globalization of manufacturing systems coupled with advancements in technology are increasingly compelling companies across verticals to concentrate on their core competencies and avail the cost saving potential of outsourcing. This is expected to contribute to an increase in the need for integrated logistics solutions, which is the niche of every Third Party Logistics Service (3PL Services) provider.

In the Indian logistics industry, logistics managers of user firms need to realize that, with supply chains getting more and more complex, outsourcing part or all of their logistical activities to experienced 3PLs (Third Party Logistics Service Providers) will help reduce their overheads, streamline supply chains, reduce costs and improve service delivery.

India's spend on logistics activities—equivalent to 13 per cent of its GDP is higher than that of the developed nations (US—9.9%, Europe—10% and Japan—11.4%). The key reason for this is the relatively higher level of inefficiencies in the system, with lower average trucking speeds, higher turnaround time at ports and high cost of administrative delays, being just a few of the examples.

These inefficiencies have arisen over the years from a combination of a non-conducive policy environment, extensive industry fragmentation and lack of good basic infrastructure. India's indirect tax regime discouraged large centralized warehouses and led, over time, to fragmentation in the warehousing sector. At the same time, the absence of a single logistics ‘champion’ (whether in form of a ministry or otherwise) in the government (or industry) led to a disintegrated approach to development of the sector.

Extensive fragmentation meant the incapacity of industry players to develop the industry as a whole and poor support infrastructure, such as roads, ports and telecom, led to a situation where the opportunity to create value is limited.

However, much of this is changing with the government now demonstrating a strong commitment towards providing an enabling infrastructure and creating conducive regulations. There is significant current and planned investment in infrastructure to the tune of (Rs 15 trillion) over the next few years and an increased emphasis on public–private partnership. At the same time, regulations around rationalization of tax structures and prevention of overloading, for example, are creating an environment of positive change. Players now have the opportunity to leverage economies of scale, complemented with better infrastructure, to provide integrated logistics solutions which are cost-effective.

In addition, the evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exist today. For example, rapid growth of organized retail and the need to reach out to the large untapped rural markets in India are necessitating development of strong back end and front end supply networks.

In Indian logistics sector, major sector investors are FMCG, aviation, metal and mining, and consumer durables. Despite shortfalls, the Indian logistics industry is growing at 20 per cent vis-à-vis the average world logistics industry growth of 10 per cent. Since the organized sector accounts for merely 1 per cent of the annual logistics cost, there is immense potential for growth of the sector.

Many large Indian business houses such as Tata and Reliance Industries have been attracted by the potential of this sector and have established logistics divisions. They started providing in-house logistics services, and soon sensing the growth of the market, have started providing services to others as well.

Large express cargo and courier companies such as Transport Corporation of India (TCI) and Blue Dart have also started logistics operations. These companies enjoy the advantage of already having a large asset base and an all-India distribution network. Some large distributors have also forayed into the logistics business for their clients. There are also logistics service providers without assets; there is growing interest among entrepreneurs to venture into this business.

Indian shippers are gradually becoming more aware of the benefits of logistics outsourcing. They are now realizing that customer service and delivery performance are equally important as much as cost to remain competitive in this global economy.

The Indian government has focused on infrastructure development. Examples include the golden quadrilateral project, east-west and north-south corridors (connecting four major metros), Free Trade and Warehousing Zones (FTWZ) in line with special economic zones (SEZ) with 100 per cent foreign direct investment (FDI) limit and public–private partnerships (PPP) in infrastructure development. It is expected that infrastructure development would boost investments in the logistics sector.

In India, 100 per cent FDI is allowed in logistics whereas in China, until recently, foreign investment was not allowed in domestic logistics. Almost all large global logistics companies have their presence in India, mainly involved in freight forwarding. They have tie-ups with Indian companies for domestic transportation and warehousing. As the Indian logistics scenario looks promising, these MNCs are expected to play a bigger role, probably forming wholly-owned subsidiaries or taking the acquisition route. The latter may be the preferred route of investment since the target company is readily acquired with its asset base and distribution network, and the need for building everything from scratch can thus be avoided. The benefits for the acquired company include the patronage of an MNC and access to the MNC's global network. As an example, DHL Danzas, the biggest logistics company in the world, has taken over Blue Dart.

In spite of the challenges, Indian Logistics industry is continuously improving its performance in the global logistics industry by improvement of customs, trade-related infrastructure, inland transit, logistics services, information systems, and port efficiency, which helps to trade goods and services on time and at a low cost. The future holds opportunities for a better tomorrow.

REVIEW QUESTIONS

1. Explain the domain of logistics.
2. Discuss the role of logistics in supply chain.
3. How is logistics used for gaining competitive advantage? Explain.
4. Discuss how logistics impacts the various business processes in an enterprise.
5. Differentiate between ‘logistics’ and ‘supply chain management’.

INTERNET EXERCISES

1. Study the latest trends in logistics management at http://www.logisticsmgmt.com
2. http://findarticles.com is site publishing latest articles on logistics and supply chain management. Visit and study how logistics is impacting supply chain performance in various industry sectors.

VIDEO LINKS

1. Future Vision on Logistics, http://www.youtube.com/watch?v=R4HPYYR5iLw&feature=related
2. Transport & Logistics Management Introductory, http://www.youtube.com/watch?v=fNGUnbtRHv
3. Nike logistics Center, http://www.youtube.com/watch?v=NkfHVYv5nUo&feature=related

PROJECT ASSIGNMENTS

1. Logistics cost as a percentage of product price is very high in case of commodity products with low unit price. Study the logistics system for cements and soft drinks and write a report on the strategies used for cost reduction in logistics activities therein.
2. Study the logistics system for the high value fashion garments for overseas markets.