Chapter One

An Overview of Logistics & Channel Management

Origin of Logistics
The concept of “Logistics” started many years before Christ and was used by Greek generals
(Leon the Wise, Alexander the Great) in order to describe all the procedures for the army’s
procurement on food, clothing, ammunition, etc. Alexander the Great was a big fan of the
mobility of his troops and he didn’t want his troops to stay in one place waiting for supplies from
Macedonia. Thus, he tried to resolve the issues of supplies by using supplies from the local
resources of his defeated enemies. For many years, logistics were always an issue in war affairs.
Kingdoms and generals with strategic planning on logistics were those who won the war. World
War II was the major motivation of logistics to increase recognition and emphasis, following the
clear importance of their contribution toward the Allied victory. Starting from the early ‘60s,
many factors, such as deregulation, competitive pressures, information technology, globalization,
profit leverage, etc., contributed to the increase of logistics science in the form we now it today.

1.1 Definition of logistics

Logistics is the management of the flow of things between the point of origin and the point of
consumption in order to meet requirements of customers or corporations. The resources managed
in logistics can include physical items, such as food, materials, animals, equipment and liquids,
as well as abstract items, such as time, information, particles, and energy.

Definition of logistics in different organizations

Business Logistics: One definition of business logistics speaks of "having the right item in the
right quantity at the right time at the right place for the right price in the right condition to the
right customer". Business logistics incorporates all industry sectors and aims to manage the
fruition of project life cycles, supply chains, and resultant efficiencies. In business, logistics may
have either an internal focus (inbound logistics) or an external focus (outbound logistics),
covering the flow and storage of materials from point of origin to point of consumption
(see supply-chain management). The main functions of a qualified logistician include inventory
management, purchasing, transportation, warehousing, consultation, and the organizing
and planning of these activities. Logisticians combine a professional knowledge of each of these
functions to coordinate resources in an organization.
Military Logistics: In military logistics, logistics officers manage how and when to move
resources to the places they are needed. In military science, maintaining one's supply lines while
disrupting those of the enemy is a crucial—some would say the most crucial—element of
military strategy, since an armed force without resources and transportation is defenseless.

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Medical logistics: is the logistics of pharmaceuticals, medical and surgical supplies, medical
devices and equipment, and other products needed to support doctors, nurses, and other health
and dental care providers.

Production Logistics: The term is used for describing logistic processes within an industry. The
purpose of production logistics is to ensure that each machine and workstation is being fed with
the right product in the right quantity and quality at the right point in time.

1.2. The role of logistics

For an Organization: Logistics in an organization are considered as a continuation of
marketing. Logistics play a critical role in each of the three critical elements of the marketing
concept (customer satisfaction, integrated effort/systems approach and corporate profit) in
several ways.
Value: Logistics is about creating value - value for customers and suppliers of the firm, and
value for the firm’s stakeholders. Value in logistics is primarily expressed in terms of time and
place. Products and services have no value unless they are in the possession of the customers
when (time) and where (place) they wish to consume them. Good logistics management views
each activity in the supply chain as contributing to the process of adding value. If little value can
be added, it is questionable whether the activity should exist. However, value is added when
customers are willing to pay more for a product or service than the cost to place it in their hands.
Logistics/SC Is Important To Strategy: Firms spend a great deal of time finding ways to
differentiate their product offerings from those of their competitors. When management
recognizes that logistics/SC affects a significant portion of a firm’s costs and that the result of
decisions made about the supply chain processes yields different levels of customer service, it is
in a position to use this effectively to penetrate new markets, to increase market share, and to
increase profits. That is, good supply chain management can generate sales, not just reduce
costs.
Logistics/SC Adds Significant Customer Value: A product, or service, is of little value if it is
not available to customers at the time and place that they wish to consume it. When a firm incurs
the cost of moving the product toward the customer or making an inventory available in a timely
manner, for the customer “value” has been created that was not there previously. It is value as
surely as that created through the production of a quality product or through a low price.

It is generally recognized that business creates four types of value in products or services. These
are: form, time, place, and possession. Logistics creates two out of these four values.
Manufacturing creates form value as inputs are converted to outputs that are raw materials are
transformed into finished goods. Logistics controls the time and place values in products, mainly
through transportation, information flows, and inventories. Possession value is often considered
the responsibility of marketing, engineering, and finance, where the value is created by helping
customers acquire the product through such mechanisms as advertising (information), technical
support, and terms of sale (pricing and credit availability).

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Logistics/SC in Non-manufacturing Areas: It is perhaps easiest to think of logistics/SC in
terms of moving and storing a physical product in a manufacturing setting. This is too narrow a
view and can lead to many missed business opportunities. The logistics/SC principles and
concepts learned over the years can be applied to such areas as service industries, the military
and even environment management.

i. Service Industry: Even though many service-oriented companies may be distributing

an intangible, nonphysical product, they do engage in many physical distribution
activities and decisions. A hospital may want to extend emergency medical care
throughout the community and must make decisions as to the locations of the centers.
ii. Environment: Population growth and resultant economic development have
heightened our awareness of environmental issues. Whether it is recycling,
packaging materials, transporting hazardous materials or refurbishing products for
resale, logisticians are involved in a major way.
1.3. Logistic systems and components
1.3.1. Components of Logistic System
The logistics system consists of the following components:

a. Customer Service
Customer service is a multi-dimensional and very important part of any organization's logistics
effort. In a broad sense, it is the output of the entire logistics effort; that is, customer service and
some resulting level of satisfaction are what the logistics system ultimately provides the buyer.
However, many organizations do have a more narrow functional view of customer service as
something they actually perform. For example, a firm may have a customer service department
with customer service employees that handle complaints, special orders, damage claims, returns,
billing problems, etc. For all intents and purposes, these employees are the organization as far as
many buyers are concerned, so their role in the overall logistics system becomes crucial.
Disappointment at this level can lead to dissatisfaction with the organization as a whole that
effectively neutralizes the entire logistics effort.
b. Inventory Management
Inventory management deals with balancing the cost of maintaining additional products on hand
against the risk of not having those items when the customer wants them (i.e. the cost of lost
sales). This task has become more complex as firms have gradually lowered inventory levels.
The challenge in this situation is to manage the rest of the logistics system to accommodate the
lack of inventory so that customer service does not suffer. However, all of the interest in
reducing inventories notwithstanding, the fact remains that inventory management is still
necessary for serving customers in many markets. So managers have to decide, whether they
need additional products in a given market and, if so, how many of which items.

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 c. Transportation
Transportation refers to the physical movement of goods from a point of origin to a point of
consumption. It can involve raw materials being brought into the production process and/or
finished goods being shipped out to the customer. Transportation has assumed a greater role in
many logistics systems for two reasons. First, the liberalization of transportation laws in many
countries has provided opportunities for knowledgeable managers to obtain better service at
lower prices than they could in the past. Second, as inventory levels have dropped in response to
the popularity of just-in-time (JIT) strategies, transportation is frequently used to offset the
potentially damaging impact on customer service levels that would otherwise result from those
inventory reductions
d. Storage
Storage and materials handling addresses the physical requirements of holding inventory.
Storage encompasses the tasks necessary to manage whatever space is needed; materials
handling is concerned with the movement of goods within that space. Thus, the former would
consider issues related to warehouse number, size, layout, and design: the latter would focus on
the systems needed to move goods into, through, and out of each facility. Obviously, an
organization's inventory policies have a direct impact on their storage and handling needs. Thus,
one result of the move to smaller inventories is the requirement for less storage space.
e. Packaging

Packaging focuses on protecting the product while it is being shipped and stored. Too much
packaging increases costs while inadequate protection can result in merchandise damage and
ultimately, customer dissatisfaction. Furthermore, since every bit of packaging is ultimately
discarded, logistics managers must also consider the societal costs associated with waste
disposal. Increasingly, firms are working to develop materials that provide requisite levels of
protection yet are recyclable or quickly biodegradable.

f. Information Processing
Information processing is what links all areas of the logistics system together. The growth of
reasonably priced computers and software has put sophisticated management information
systems within the reach of even the smallest organization. Indeed firms are now linking their
internal logistics information systems with those of their vendors and customers as a means of
adding more value to the entire chain. Such an open exchange of information can result in faster
order placement, quicker benefit delivery, and greater accountability throughout the logistics
process.
g. Demand Forecasting

Demand forecasting addresses the need for accurate information on future customer needs. The
logistics system ensures the right products and / or services are available to meet customer
requirements. Logistics requirements necessitate going beyond market sales forecasting to obtain
specific data on the timing, mix, and quantity of benefits desired by buyers. Without this

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information, the logistics system runs the risk of compromising customer satisfaction rather than
enhancing it

h. Production Planning

Production planning can be included under logistics because manufacturing needs components
and raw materials in order to make finished goods that are, in turn, demanded by a customer.
Thus, production planning is arguably at the center of the entire logistics process, yet it is often
viewed as a stand-alone entity with its own objectives and agenda. The risk here is that
production rather than customer needs becomes the primary focus, a situation that can lead to
customer dissatisfaction

i. Purchasing

Purchasing deals with the buying of goods and services that keep the organization functioning.
Since these inputs can have a direct impact on both the cost and quality of the final product /
service offered to the consumer, this activity is vital to the overall success of the logistics effort.
In addition, the move away from local sourcing in favor of global buying has complicated this
entire process dramatically in recent years.
j. Facility Location
Facility location addresses the strategic placement of warehouses, plants, and transportations
resources to achieve customer service objectives and minimize cost. Although not necessarily
made often, these decisions can have long term and potentially costly implications for the
organization.

Clearly any one organization is unlikely to require all these specific tasks to be accomplished.
For example, a service firm such as an airline might combine elements from the information
processing, maintenance, demand forecasting, customer service, and purchasing functions into a
logistics system designed to reach its customers. On the other hand, a manufacturer of consumer
goods may draw from transportation, inventory management, storage, materials handling and
packaging in addition to customer service, purchasing and demand forecasting for their logistics
support.
The point is that every organization, be it manufacturer or service provider, for-profit or non-
profit, has customers that it wants to reach. By integrating the appropriate functions into a
customer-focused logistics system, the enterprise can develop a sustainable advantage that is
very difficult to be imitated by a competitor.

Logistics Costs

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Total cost approach: Addresses all of the costs of logistics together and seeks to minimize the
total cost. A company must examine the cost of each component and how it affects the other
components.

Transportation: Transportation is the most fundamental and obviously necessary component of

any logistics system. Transportation is also often the component accounting for the highest
percentage of the total cost of logistics. The overriding issue facing the firm is choosing the
optimum mode of transportation to meet customer service demands.

Materials Handling: This encompasses the range of activities and equipment involved in the
placement and movement of products in storage areas. Issues that must be addressed when
designing materials handling systems include how to minimize the distances products are moved,
what kinds of mechanical equipment to use to minimize costs, and how best to use labor.

Order Processing: Order processing is often a key component of logistics, and developing an
efficient order processing system can often be far from routine! The importance of order
processing in logistics lies in its relationship with order cycle time- The length of time between
when an order is placed and when it is finally received by the customer.

Inventory Control: Inventory carrying costs – including the costs of financing, insurance,
storage, and lost, damaged and stolen goods.

Warehousing: concerned with the holding of products until they are ready to be sold.
Warehousing can be one of the more complex components of a logistics system because it entails
several key decisions like where to locate warehouses, how many, size, design and ownership.

Packaging: Packaging and the costs associated with the packaging of products. Effective
packaging can help reduce inventory-carrying costs by reducing product damage.

1.4. The output of logistic system: Customer Service

Service Standards: The attempt to define and enumerate services and to measure performance
against these standards
The following nine categories of logistics service standards:
1. Time from order receipt to order shipment
2. Order size and assortment constraints
3. Percentage of items out of stock
4. Percentage of orders filled accurately
5. Percentage of orders filled within a given number of days from receipt of the order
6. Percentage of orders filled
7. Percentage of customer orders that arrive in good condition
8. Order cycle time (time from order placement to order delivery)
9. Ease and flexibility of order placement
1.5. Four key area of interfaces between logistics & Channel management

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Channel management and logistics management go together hand in hand to provide effective
and efficient distribution. The meshing of channel management and logistics management
requires good coordination. This especially applies to four major areas of interface between
channel management and logistics management.

1. Defining Logistics Service Standards

In general, the higher the service standards the manufacturer offers the higher the costs. It is
usually not possible to completely escape the trade-off of higher costs for higher service
standards. Thus, the key issue facing the channel manager with respect to defining logistics
service standards is to determine precisely the types and levels of logistics service desired by the
channel members. To deal with this issue effectively, the channel manager needs to obtain the
channel members’ views about what kinds of service standards they want before developing a
logistics program. The development of logistics service standards should not be based solely on
what the manufacturer wants; the views of the channel members should also be incorporated. If
this is done, the set of logistics standards is much more likely to reflect what the channel
members actually want.

2. Evaluating the Logistics Program

A logistics program may be offered to channel members as a separate entity or may be included
as a major component of the manufacturer’s overall approach for supporting channel member
needs. The logistics program may be a key feature of a channel “partnership” or strategic
alliance. The channel manager should play a role to ensure that the program does indeed meet
the channel members’ service requirements. It does require the channel manager to have a clear
understanding of the objectives of the logistics program. In short, it is the job of the channel
manager to make sure that the program is really what the channel members want.

3. Selling the Channel Members on the Logistics Program

Manufacturers should emphasize that a new logistics program can foster:

A. Minimizing Out-Of-Stock Occurrences

By minimizing out-of-stock occurrences through an improved logistics program, sales lost by the
channel members will be reduced. Overselling the benefits of the new system to the channel
members should be avoided due to some systems failing to live up to expected promises.

B. Reducing Channel Member Inventory Requirements

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A well-designed and responsive logistics program can mean shortened channel member order
cycles, which means that they can carry less inventory. The principle of JIT is to have only
enough inventories on hand to meet the immediate production requirements with no reserve
stock. JIT depends upon excellent cooperation between the manufacturer and its suppliers and
also on a superbly designed and executed logistics system.

C. Strengthening the Manufacturer–Channel Member Relationship

A carefully designed logistics program aimed at improving service to the channel members can
serve as one of the most tangible signs of the manufacturer’s concern and commitment to the
channel members’ success. In presenting a proposed logistics program to the channel members,
the manufacturer should emphasize that the program was conceived to help them (channel
members) be more successful. An improved logistics management system offers great potential
as a strategic marketing tool – as it will offer greater potential to those manufacturers who are
able to, with their superior logistics capabilities, help channel members improve their logistics
and marketing capabilities as well.

4. Monitoring the Logistics System

Logistics systems must be continuously monitored, both in terms of how successful they are in
performing for the manufacturer and, just as important, how well they are meeting channel
member needs. The channel manager should continually monitor the channel members’ reactions
to the logistics program. The most effective way is to conduct a survey of a sample of channel
members. The survey should be part of the overall marketing channel audit. If the survey or
audit finds areas for improvement or deficiencies, the manufacturer must actually follow through
and make these improvements or correct these deficiencies.