1 Logistics: At the Centre of World Trade After reading the chapter, chapter, the students should be able 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 c onnects 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 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 Country
Logistics Costs
Logistics cost/GDP (in per cent)
Share of 3p in overall logis
China, India
13–15
<10
US
9.9
57
Europe
10
30–40
Japan
11.4
80
Source: KPMG, 2007, Skill Gaps in Indian Logistics Sector— A White Paper, http://www.scribd.com/doc/456519/Skill-Gaps-in-IndiasLogistics-KPMG-2007.
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. PERVASIVENESS OF LOGISTICS
Logic in Logistics for 30-Minutes Pizza Ideally, the time taken for registering the order should be one minute. After that the pizza goes to the guy in the “make line.” He
takes two minutes, and then oven time is five minutes. When the pizza comes out of the oven it is inspected. One minute goes into quality check and packing. Another minute goes in checking the route and confirming the order one last time. The moment he is leaving, the delivery boy shouts the out-of-the-door time, which is normally between 10 and 12 minutes. Then everybody yells out “drive safe.” When he returns he punches the time in. At the end of the day the average delivery time for all his orders is checked. This helps the manager figure out which orders were not delivered in time. The next day, the store manager calls each one of those whose orders got delayed and apologizes. The essence is process sequencing, just-in-time inventory availability, and time management for the success in this service operations logistics. Source: http://www.agencyfaqs.com/news/interviews/data/68. html
Twenty-Four Hour ATM An ATM (automatic teller machine) is not a novelty today. Invariably, all major banks in India started this service as a part of the retail finance drive. In fact, foreign banks operating in India were the pioneers in ATMs in India. However, the lead taken by ICICI, HDFC, and Citi Bank gave the face-lift to the ATM concept, as a result of which it has witnessed an exponential growth to over 6000 numbers. The success of ATMs depend on the effectiveness of the networking. The logistics supply chain for the currency notes needs to be very efficient so as to ensure the availability of the currency notes at the stroke of a button. An ATM is a service product having perishability as the basic characteristic, which needs to be looked into to satisfy the “any time” cash need of the customer who is time starved. The other logistics aspect is the information on the credit limits available to the customer at any point of cash withdrawal. Data warehousing and data mining with automatic updating for real-time information on credit worthiness are the other essential support systems required for processing the customer request for cash withdrawal. E-business solution takes
care of the complex transaction processes involved in ATM operations.
Dabbawalas of Mumbai Dabbawalas of Mumbai offer a reliable foolproof logistics system of delivering lunch boxes to over 200,000 office employees every day without mix up of having the wrong tiffin going to the wrong office or arriving late, irrespective of conditions such as rains, strikes, and scorching heat. A team of around 5000 men and women, mostly illiterate, operate in assigned areas in Mumbai, each handling 25– 30 dabbas, which is the optimum lot size as more could create confusion and affect promptness, which will lead to customer dissatisfaction. The dabbas are collected from the houses and put in tiffin racks at a network of 96 railway stations all over Mumbai to load into the train for further movement toward delivery points. They use a colour code system on the dabbas to identify the collection and delivery points. After the lunch hour, the system operates in reverse direction, again displaying accuracy with collection and quality of delivery closer to Six Sigma. This system gives a much cheaper alternative to office workers than having their food in restaurants and food joints. With this logistics system, 400,000 transactions are done daily with the precision of Six Sigma accuracy. Source: Information adapted from MyDabbawala.com.
Laundry Service in Five Star Hotels The laundry service in a five star hotels is a very simple service operation that does not use any sophisticated software tools. At 10 a.m., the housekeeping department collects the laundry from 210 rooms of a 300-room hotel operating at 70 per cent occupancy. The laundry is divided into three parts; staff uniforms, room laundry (bed sheets, pillow covers), and guest clothes. Special attention is given to the guest’s clothes for same-day or express delivery. Every single piece of clothing is allotted an identification code, and the information is punched into the computer for tracking, processing, and final delivery. The entire laundry is handed over to the laundry service supplier, who collects the laundry in the morning and
delivers to the housekeeping department in the evening per the customers’ requirements. This is a simple but effective laundry logistics operation of a hotel housekeeping department that leads to customer satisfaction.
Indian Postal Service Indian Postal Service is one of the largest logistics networks in the world today that delivers the letters in the most cost-effective way. The Indian Postal Service operates through a network of 1,52,781 post offices covering 6,09,030 villages, towns, and cities across the country, delivering 43 million letters every day. They use all transportation modes available in India for movement of postal cargo. The collection of letters from 542,781 letter boxes, followed by sorting, packing, moving, unpacking, and again sorting for final delivery is a mammoth logistical task that they have performed cost effectively for the past one and a half centuries. Source: http://www.diehardindian.com/infra/postal.htm
Gulf War in 1991 After World War II, the 1991 Gulf War was the largest military operation, lasting for four days. The planning process of logistics operations was initiated many months before the actual war started. It involved the movement of over 1,25,000 ground troops to defend the area, stretching to 175 km long and 300 km deep in the Saudi Arabian desert. Around 500 tactical cargo trucks and 200 wheeled vehicles moved into place within the short time frame of two weeks. The ammunition of 35,000 tonnes, fuel of 5.6 million gallons, rations of 2 million meals, and drinking water of 1 million gallons were made available at the appropriate time during the war operations. Entire logistics operations were based on information flow, which was based on excellent communication connectivity across the supply chain using the latest technology. The status of material, food, maintenance, and manpower to individual supply chain centres was reported on a daily basis to organize and facilitate speedy replenishment from the United States and bases in Europe. The logistics involved were of mammoth scale. However,
efficiency and effectiveness of logistics operations contributed greatly to the success of the winners. Source: http://bib.cfc.dnd.ca, http://en.wikipedia.org
Public Distribution System Food Corporation of India (FCI), a government undertaking, is handling the massive logistics operations of the procurement, storage, and distribution of foodgrains throughout the country. FCI moves around 22 million tonnes of foodgrains over the distance of 1500 km per annum. On an average, 4,00,000 bags are transported by rail, road, and inland water from the point of production to the point of consumption for distribution across 4,50,000 fair price shops spread across the country. On an average, FCI is storing over 23 million tonnes of grains in 1700 warehouses, which are near the consumption centres at various locations in the country.
