INTRODUCTION

Logistics is the management of the flow of goods, information and other resources in a repair
cycle between the point of origin and the point of consumption in order to meet the requirements
of customers. Logistics involves the integration of information, transportation, inventory,
warehousing, material handling, and packaging, and occasionally security. Logistics is a channel
of the supply chain which adds the value of time and place utility. Today the complexity of
production logistics can be modeled, analyzed, visualized and optimized by plant simulation
software.

The term Logistics Management is that part of Supply Chain Management that plans,
implements, and controls the efficient, effective, forward, and reverse flow and storage of goods,
services, and related information between the point of origin and the point of consumption in
order to meet. The commercial network takes care of the resources required for the efficient and
effective operation of the logistical network. The logistical network is involved in the actual
transportation of the goods and services from the place of manufacture to the place of
consumption.

In India, the logistics costs are higher than in the developed markets-estimated to be around
13%of the GDP against 9%of the GDP in the US. It also called the physical distribution function.
Normally when logistics management is talked about, the entire supply chain is considered, from
the raw material procurement stage to the delivery of finished goods to the customers. Logistics
is 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 the point of origin to the point of consumption for the
purpose of conforming to customer requirements
OBJECTIVES OF LOGISTICS

1. Broad objectives of the logistics strategy are drawn from the distribution strategy which
in turn forms part of the marketing strategy
2. Usually the logistics strategy brings together the components of the manufacturing and
marketing strategies of the firm
3. Cost reduction
4. Capital reduction
5. Service improvement

FUNCTIONS OF LOGISTICS

1. Products are ordered, billed/invoiced, handled, packaged, packed, wrapped, bundled,

sorted, crated, and braced.
2. Products are assembled and stored, warehoused, loaded, unloaded, shelved, displayed and
crossdocked.
3. Products are shipped by air, railways, waterways, pipelines, and containers.
4. Products are exported, imported, documented marked and consolidated.
5. Products are traced, tracked, recycled and disposed.
6. Logistics customers service standards are set(time, availability, errors etc) 
7. Breaking Bulks
8. Accumulating Bulk
9. Creating Assortments
10. Transaction Efficiency
11. Credit Facilities
12. Risk Taking
OUTBOUND LOGISTICS

Movement of material associated with storing, transporting, and distribution a firm's goods to

its customers. It includes the delivery of the finished goods and service to the customers from the
manufacturer’s end. It’s a critical activity in any firm as it directly links the company to its
consumer and comprises a ser of activities that complements the marketing function of the firm.
Outbound logistics usually absorbs significant resources of the firm both in terms of the financial
resources as well as human resources.

In FMCG sector almost 40%of the final cost that a customer pays is absorbed by logistical
activities. Logistics cost vary from industry to industry. With improved co-ordination and
efficient planning, it is possible for a company to reduce the expenditure on logistics.

LOGISTICS STRATEGY

1. COST REDUCTION
• It aimed at reducing the variable cost related to the movement and storage of goods. The
service levels are usually not altered for the sake of cost reduction.
• The cost reduction is usually achieved by such tactics like- Altering the number and
location of warehouses, altering the mode of transport
• Route optimization for the transport function
• Optimizing the quantum of inventory
• Technology can also be used to reduce the variable cost of logistics
• Many FMCG companies are providing palmtops to their grassroots level sales people so
that the order booking can be expedited to effect a reduction in the finished goods
inventory
 2. CAPITAL REDUCTION
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The main aim is to maximize the return on investment

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It means working towards minimizing the level of investment in the logistical
system (assets may be warehouses, trucks, material handling equipment, soft-ware
for order processing etc.)

Substantial capital reduction can be achieved by leasing and renting facilities

without affecting the service output to the customers (company owning
warehouses can reduce its capital outlay by selling these warehouses and leasing
facilities else where)

3. SERVICE IMPROVEMENTS
 It means in giving better service across the dimension of service without
substantially increasing the cost of logistics
Although the costs increase rapidly with greater service levels, service
improvements can also be achieved in the context of greater anticipation of
revenue by attracting more customers
The increase in logistics costs can thus be offset by the increase in revenue

LOGISTICS PLANNING
1. FACILITY DECISIONS- According to Simchi-levi et al (2000),three generic types of
outbound logistics strategies are possible-
 direct shipment
 warehousing
 cross-docking

(a) Direct shipping- Goods once manufactured are directly shipped to the point of sale
without being stocked anywhere. Is practicable and increasingly being adopted by
companies like DELL the world over. It is an extremely difficult strategy to implement
especially when there is need for an extensive distribution network so as to give
maximum spatial convenience to the customers.

(b) Cross Docking- While warehouses do exist, the storage time is reduced to a minimum. In
this strategy, items are distributed continuously from suppliers through warehouses to
suppliers with the items lying in the warehouse for a just few hours. Requires a high
level of co-ordination between production and sales department. Is extensively adopted
by Wal-Mart. In a typical cross-docking system, goods spend very little time in storage
often less than 12 hours. The inventory destination is known when stocks are received
customer is ready to receive inventory immediately. The number of locations to ship
inventories is not high (less than 200). it is possible to pre-label the inventory). Inventory
arrives at a state where it is immediately conveyable

(c) Warehousing- The main function of a warehouse is to store inventory or perform the
critical functions of accumulation, storage and allocation. When the orders from the
retailers or customers are mostly composite orders comprising an assortment of products.
Also it serves as points of allocation (products received in bulk quantities are broken
down into smaller quantities as ordered from the retailers). Warehouses help in
achieving greater economies of scale as it becomes possible to transport goods in large
 quantities after clubbing orders from retailer’s .Warehouses also protect the inventory
from damage and pilferage so that in case of slow-moving items, they can be stored
safely for a longer period.

FUNCTIONS

1. Movement function- This refers to receiving-unloading of the goods, updating of the

inventory records, inspection of damage, verification of the merchandise count against
the orders and shipping records. Transferring-involves the shipment received to locations
within the warehouse specifically meant for the storage of that category of inventory to
enable easy access whenever required. Order picking/selection-takes place whenever the
warehouse gets an order from the downstream recipient for the goods stored. Once the
order is received, the order is picked and packed to be shipped after selecting the mode of
transport, after adjusting the inventory records.

2. Storage function- May be performed on a temporary or a semi-permanent basis. At the

initial stage of the logistical system design, the nature of storage in warehouse is decided.
Goods can be stored in a warehouse temporarily awaiting an order from the downstream
intermediary or for seasonal products, goods can be stored for a reasonably long period
either to offset the seasonal demand or on the basis of speculation or forward buying.

JUST IN TIME INVENTORY (JIT)

Just-in-time (JIT) is an inventory strategy that strives to improve a business's return on

investment by reducing in-process inventory and associated carrying costs. Just In Time
production method is also called the Toyota Production System. To meet JIT objectives, the
process relies on signals or Kanban between different points in the process, which tell production
when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as
the presence or absence of a part on a shelf. Implemented correctly, JIT can improve a
manufacturing organization's return on investment, quality, and efficiency. Quick notice that
stock depletion requires personnel to order new stock is critical to the inventory reduction at the
center of JIT. This saves warehouse space and costs. However, the complete mechanism for
making this work is often misunderstood. It was pioneered by Japanese auto manufacturers like
Toyota. Aims at reducing the raw material inventory to virtually zero levels so that the raw
material reaches the production site just when it is required for use. Reduces costs by focusing on
identification and elimination of waste found in the manufacturing system. Requires extensive
planning and coordination among the vendors and the production plant. Involves accurate
forecasting of the requirements on a day to day or even on an hourly basis as well as
synchronizing the ordering and delivery of products with extremely high levels of precision. JIT
practices require a ‘pull’ system of manufacturing where the production takes place entirely on
the basis of demand generated. Under JIT, close and frequent communication between buyers
and sellers is required. The suppliers are given deep insights into the buyer’s production
schedule. From a distribution point of view, ability to deliver products on a JIT basis can be
used as a major differentiator by companies (Jindal vidyanagar steel )which offers all its
customers delivery only when they exactly want it. To facilitate this ,the company has employed
a fleet of Volvo trucks with a capacity of 60 tons that are routed in a highly optimized traveling
pattern so that travel time is reduced to the minimum.

IMPORTANCE OF INVENTORIES

1) Improves customer service

2) Smoothens the operations of the logistics system

3) Reduces costs

4) Objectives of inventory management

5) Fill rate expression

Demand is normally very stochastic in the short term. Exact level of demand cannot be
accurately predicted in the short term however production facilities are programmed in advance.
Inventory is required to service the possible increase in demand that might occur defying the
forecasts. Every logistics system will have a lead time between the order transmission and the
order receipt. Highly inefficient system will have a lengthier lead time

Inventory enables the smooth functioning of the logistical system as otherwise there will be
immense pressure on the logistics system to cut the lead time, which may lead to un-economical
decisions like using costly transportation alternatives.

OBJECTIVES OF INVENTORY MANAGEMENT

• Inventory management aims to achieve the perfect balance between achieving customer
service targets and reducing inventory costs

• The customer service demands are expressed in terms of product availability

• The term used to express the service level is fill rate (FR)

• Fill Rate is defined as the ratio of the number of orders completely serviced to the total
number of orders received during a particular time period.

1. FILL RATE EXPESSION - Both the measures are used to denote the extent to which the
warehouse or the inventory management system has been able to fulfill the orders placed
in the expected lead time. It is in reality an indication of the system’s ability to anticipate
the demand from the retailers or customer downstream. These expressions are more
relevant in case of a system that handles several items or SKUs (stock keeping units).

2. Costs associated with inventory

(a) inventory procurement costs
(b) inventory carrying costs
(c) stockout costs
 (d) These costs are considered to be in conflict or should be traded off appropriately in
the inventory system

A. Inventory procurement cost- Are the ordering costs for the inventory. These are fixed
costs which have to be incurred in- setting up the machinery, procurement of related
materials. Transportation, order processing. When the order quantity is large, the
procurement costs will come down.

B. Inventory carrying cost-

1) Capital costs

2) Inventory service costs

3) Storage space costs

4) Inventory risk costs

C. Capital cost- To build up inventory, sufficient capital has to be tied up for a considerable
length of time. Research estimates that, on an average, this constitutes about 80%of the entire
inventory carrying costs. If the investment on inventory is from debts, then the debt-servicing
costs can be used but when the inventory investment is from internal sources then the
opportunity costs have to be calculated.

D. Inventory service costs- Consist of mostly insurance and taxes. Insurance has to be paid to
protect the inventory against such contingencies as fire, theft, accidents during transportation etc

E. Storage space costs- Relate to the charges for the warehouse including the rent, maintenance
charges etc. Usually it is calculated based on the cubic footage of inventory stored in the
warehouse. The charges would also often include the maintenance cost of the warehouse.