Physical distribution is concerned with moving goods in a timely and secure way from producer to consumer, taking all factors into account, including budget. Physical distribution is therefore about organising transportation to move goods via road, rail, sea and air. Logistics, on the other hand, takes a holistic view of the process. A logistics approach considers the entire process of delivering value to customers, starting with raw materials extraction and taking the whole transport problem through all the stages of adding value. The aim is to create a seamless system for moving goods from where they are produced to where they are needed.
For example, cargo containers have replaced the previous system for shipping cargoes, which required a great deal of handling. Goods were loaded onto lorries at the factories, taken to warehouses and unloaded, then loaded manually onto ships using a total of 18 men (eight on the dockside, eight in the cargo hold and two operating the ship's derricks), then the whole sequence had to be repeated at the port of arrival. During the 1970s containers were introduced, which can be filled at the factory, delivered to the ship and loaded by only one or two men. The goods need not be handled again until they reach their destination. This has reduced damage to goods, reduced theft and dramatically reduced costs as fewer dockers are needed and each ship only spends a few hours in port instead of the days formerly needed.
Logistics is central to supply-chain management. Transport and warehousing links are the intermediate links in the supply chain, rather than the main concern as they are in physical distribution orientation. The most dramatic cost reductions can be made in these areas, with consequent improvement in competitive advantage either through increase in profit or reduction in price to the consumers.
Co-ordinating the supply chain requires the following factors to be in place:
Transparency of data communication, so that all those involved are kept informed as to what is happening to the goods.
A co-ordinating philosophy or set of rules to which each member of the supply chain subscribes.
IT systems enable logistics co-ordinators to track consignments in real time wherever they are in the world. This makes the use of resources much more efficient: aircraft can always fly full, ships can be loaded swiftly and spend more time at sea, warehouses can be smaller because goods stay for shorter periods of time. Another use of IT has been to minimise wasted journeys or part-full journeys: online systems exist for co-ordinating cargoes so that a driver can collect a return cargo rather than driving back empty after making a delivery.
The logistics approach has been adopted widely by global firms. Shipping and trucking companies have redefined themselves as logistics facilitators, which means taking responsibility for the whole process of moving goods from the factory gates to the final destination, using whatever means may be available.
Logistics managers are responsible for some or all of the following interfaces:
Collaboration with physical distribution. This means selecting appropriate transportation methods, e.g. choosing between road, rail, sea or air.
Optimisation of the flow of materials within the work centre, in other words organising warehouse operations so that goods move easily from one place to another.
Planning and organising storage area layouts, and the type of handling equipment involved. This may involve automating the warehouse, bringing in specialist handling equipment and so forth.
Selection of suppliers for raw materials, and negotiating price levels and specifications.
Selection of subcontractors to perform specific tasks.
Organising after-sales activities, including problem resolution with supplied products.
Verifying that sales forecasts accord with the real needs of the client.
Developing delivery schedules.
Developing packaging to meet the need for physical strength and security.
Not all elements of the logistical system are under the control of the logistics managers. Transport delays due to bad weather, new documentation requirements due to changes in legislation, channel members going bankrupt, or even shortages of fuel can disrupt even the best organised systems. This means that even greater care should be taken with those elements that are controllable: these are shown in Box 3.3.
Each element of the logistics system impacts on every other element, as is the case with many other complex problems. If the supplier is unreliable, the customer will need to keep large buffer stocks: worse, if supplies fail the customer may lose production or even customers. Most customers therefore favour reliable suppliers, and will even pay premium prices for this, so good logistics improves competitive advantage either through improved profits or through more loyal customers.
There are two main variables which must be traded off against each other: first, the total distribution cost, which most managers would try to minimise, and second the level of logistical service given to customers. Costs will rise as service improves: there is likely to be a diminishing return for extra expenditure, so there is a point at which further expenditure is unlikely to improve service levels.
Managers balance cost and service level so as to maximise the firm's ability to achieve its strategic objectives. The total-cost approach assumes that any logistical decision impacts on all other logistical problems, so managers need to consider the efficiency of the system as a whole rather than considering individual elements in isolation. The interactions between the elements are described as cost trade-offs, because an increase in one cost may be matched by a decrease in another. Reducing overall costs is the aim of this approach, but there are difficulties.
One complication is that each element of the logistical system is likely to be controlled by a different firm, with its own cost structure and strategic aims. An increase in cost for one element of the system will not necessarily be offset by a reduction in cost elsewhere, since the gainer and the loser are different firms. Even within a single firm, different departments will have their own budgetary constraints–managers may not be prepared to lose out so that someone else in the organisation can gain. Organising the logistical system as a seamless whole will mean that managers immediately run into these problems, which of course places a premium on supply chain integration.
In some cases the business must maintain the highest possible service levels whatever the cost. For example, delivery of urgent medical supplies is not cost-sensitive, but it is highly service-sensitive. At the other extreme, delivery of paper for recycling is unlikely to be service-sensitive, but almost certainly will be cost-sensitive.
Determining the level of service is not easy because calculating the possible revenue gains from an improvement in customer service levels is not a straightforward process. The number of factors involved is large: competitive pressures, customer preferences, industry norms and so forth need to be taken into account. The cost element is much easier to calculate, however, and the net gain can be assessed by combining the elements of service level and cost penalty.
See also: distribution, channel management
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