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Logistics Administration.

Objective: To provide the students with the basic elements of the logistics
administration and the physical distribution in order to take the right decisions.


a) Total Distribution Concept and logistics administration

b) Customer service, logistics and customer service and customer service vs. cost

c) Channel of distribution strategy, selection of the channel and distribution

d) Warehousing

Total Distribution Concept and logistics administration

Logistics is a broad, far-reaching function which has a major impact on

society’s standard of living. In a modern society, we have come to expect excellent
logistics services, and tend to notice logistics only when there is a problem. To
understand some of the implications to consumers of logistics activities, consider:

a) The difficulty in shopping for food, clothing and other items if logical systems
do not conveniently bring all those items together in one place, such as a single
store or a shopping mall. Example:

b) The challenge in processing the proper size or style of an item if logistical

systems do not provide for a wide mix of products, colors, sizes and styles through
the assortment process.

c) The frustration of going to store to purchase an advertised item, only to find out
the store’s shipment is late in arriving. Example:

Definition of Logistics Administration

It is important to establish the meaning of the term. Logistics has been called
by many names:

a) Business logistics

b) Channel management

c) Distribution

d) Industrial logistics

e) Logistical management
f) Materials management

g) Physical distribution

h) Quick-response systems

i) Supply chain management

j) Supply management

Definition of Logistics Administration

These terms have in common that they deal with the management of the flow of
goods and materials from point of origin to point of consumption and in some cases
even to the point of disposal

Definition of Logistics Administration

The Council of Logistics Management (CLM) one of the leading professional

organizations for logistics personnel, uses the term logistics administration or
management to describe:

The process of planning, implementing, and controlling the efficient, effective

flow and storage of goods, services, and related information from point of origin to
point of consumption for the purpose of conforming to customers requirements.

Definition of Logistics Administration

This definition includes the flow of materials and services in both the manufacturing
and service sectors. The service sector includes entities such as the government,
hospitals, banks, retailers and wholesalers. In addition the ultimate disposal,
recycling and reuse of the products need to be considered because of logistics is
becoming increasingly responsible for issues such as removing packaging materials
once a product is delivered and removing old equipment

Role of logistics in the economy

Logistics play a key role in the economy in two significant ways. First, logistics is
one of the major expenditures for business, thereby affecting and being affected by
other economic activities. In the United States, for example, logistics contributed
approximately 10.5 % of the GDP in 1996.

Second, logistics supports the movement and flow of many economies transactions,
it is a important activity in facilitating the sale of virtually all goods and services. To
understand this role from a systems perspective, consider that if goods do not
arrive on time, customers can not buy them. If goods do not arrive in the proper
place or in the proper condition, no sale can be made.

Customer Service and Logistics

In times of tough competition when many organizations offer similar products in

terms of price, features and quality, customer service differentiation can provide an
organization with a distinct advantage over the competition. Customer service
represents the output of the logistics system as well as the “place” component of
the organization’s marketing mix. Customer service performance is a measure of
how well the logistics system functions in creating time and place utility, with a
focus on external customers. The level of customer service provided to customers
determines whether the organization will retain existing customers and how many
new customers will atract.

Definition of Customer Service

The definition of customer service varies across organizations. Suppliers and their
customers can view the concept of customer service quite differently. In a broad
sense, customer service is the measure of how well logistics systems is performing
providing time and place utility for a product or service.

* Definition of Customer Service

Customer service can be defined as: a process which takes place between
the buyer, seller and third party. The process results in a value added to the product
or service exchanged. This value added in the exchange process might be short
term as in a single transaction or longer term as in a contractual relationship. The
value added is also shared, in that each of the parties to the transaction than it was
before the transaction took place. Thus, in a process view: Customer Service is a
process for providing significant value-added benefits to the supply chain in a cost-
effective way. Example: KEY ACCOUNTS!!!

Theory of 80-20 /20-80




Definition of Customer Service

It is very expensive to win customers. Keeping customers should be a paramount
concern. Determining what customers need in terms of service level and delivering
upon those needs in a cost-effective and efficient manner should be a key concern
of the logistics function. A goal should be “ DO IT RIGHT THE FIRST TIME” to prevent
complains from ever occurring. A recent study indicates that for every customer
that complains, as many as 19 (out of 100) choose to stop doing business with the
organization and usually tell their associates about their negative experience.

Customer Service vs. Logistics Cost

The total of logistics expenditures such as carrying inventory, transportation, and

information/order processing can be viewed as the company’s expenditures on
customer service. The objective is to provide the organization with the lowest total
logistics costs, given a specific customer service level. In some cases simultaneous
improvement may occur in multiple areas, and the organization reduce its total cost
while providing improved customer service. This is only possible by taking the
perspective of the total system in the long run.

Channel of distribution

A channel of distribution can be defined as the collection of organizational units,

institutions or agencies within or external to the manufacturer, which performs the
functions that support product marketing. The marketing functions are pervasive,
they include buying, selling, transporting, storing, grading, financing, bearing
market risk and providing marketing information. Any organizational unit, institution
or agency that performs one or more of the marketing functions is a member of a
channel of distribution.

Channel of distribution structure

The structure of a channel of distribution is determined by the marketing functions

that specific organizations perform. Some channel members perform single
functions; carriers transport products and public warehouses store them. Others,
such as third party logistics an wholesalers perform multiple functions. Channel
structure affects control over the performance of functions, the speed of delivery
and communications and the cost of operations.

The specific structure depends to a large extent on the nature of the product and
the firm’s target market. There is no “best” channel structure within the framework
of the firm’s corporate and marketing objectives, its operating philosophy, its
strengths and weaknesses and its infrastructure of manufacturing facilities and
warehouses. If the firm has targeted multiple market segments, management may
have to develop multiple channels to service these markets efficiently

Channel of distribution structure

Channel structure may be viewed as a function of product life cycle, logistics
systems, effective communication networks, product characteristics or firm size.

The “best” channel forms when no other group of institutions generates more
profits or more consumer satisfaction per dollar of product cost. Functions will be
shifted from one channel member to another in order to achieve the most efficient
and effective channel structure.

Efficient – Effective

These two qualitative adjectives are often confused. If somebody or something is

efficient, then he, she or it works in a well-organized way, without wasting time or
energy. Being 'Efficient' is doing what you do well. An example:

'This engine is really efficient, it can run for 30 km on only 1 liter of fuel.'

If something is effective, it works well and produces the results that were intended.
Being 'Effective' means not just doing what you do well; it means doing the what's
most important first, and doing it well. When you are truly being 'Effective' you are
doing what needs to be done next to help you reach your final goal or vision.

'These tablets really are effective. My headache’s much better now.'

'The only effective way to avoid hay fever at this time of the year, if you are a
sufferer, is to stay indoors.'

Channel of distribution structure

Additional factors that might influence channel structure include:

* Technological, cultural, physical, social and political factors

* Physical factors, geography, size of market area, location of production centers

and concentration of population

* Local, state and federal laws

* Social and behavioral variables.

For example, social, cultural, political and economic variables may support channels
that are not necessarily as efficient or effective as they should be

Channel of distribution selection and strategy

When selecting a channel of distribution, management must consider market

coverage objectives, product characteristics, customer service objectives and
Market Coverage Objectives

To establish market coverage objectives, management must consider customer

buying behavior, the type of distribution required, channel structure and the degree
of control necessary for success.

Channel of distribution selection and strategy

Product Characteristics

Product Characteristics are a major consideration in channel design. Nine product

characteristics should be analyzed by the channel designer: product value,
technicality of the product, degree of market acceptance, degree of substitutability,
product bulk, product perishability, degree of market concentration, seasonality and
width and depth of the product line.

Channel of distribution selection and strategy

Customer Service Objectives

Customer service represents the place component of marketing mix. It can be used
to differentiate the product or influence the market price, if customers are willing to
pay more for better service. In addition the channel of distribution selected
determines the costs of providing a specified level of customer service. Customer
service is usually measured in terms of the level of product availability, speed and
consistency of the customer’s order cycle and communication

Channel of distribution selection and strategy

Profitability objectives

The profitability of various channels of distribution is the major criterion in channel

selection and strategy.

Management can use market research to formulate revenue estimates for each
alternative channel structure. It must estimate variable manufacturing costs for
different levels of activity and variable marketing and logistics costs (e.g. sales
commissions, transportation, warehousing and order processing) with accounts
receivable. Management should apply the corporate cost of money to accounts
receivable. It also should add to each channel alternative the assignable non-
variable costs incurred for each segment, including bad debts, sales promotion,
salaries and inventory carrying costs. Finally, management should use the
corporate opportunity cost of money as charge for all other assets required by each
channel alternative.

We can define warehousing as that part of a firm’s logistics system that stores
products (raw materials, parts, goods-in-process, finished goods) at and between
point of origin and point of consumption and provide information to management on
the status, condition, and disposition of items being stored. The term Distribution
Center (DC) is sometimes used, but the terms are not identical. Warehouse is the
more generic term.


Warehousing has traditionally provided storage of products (referred to as

inventory) during all phases of the logistics process. Two basic types of inventories
can be placed into storage: raw materials, components and parts (physical supply)
and finished goods (physical distribution). Also there may be inventories of goods-
in-process and materials to be disposed of or recycled although in most firms these
constitute only a small portion of total inventories.

Warehousing Optimization

To obtain maximum logistics efficiency, each component of logistics system must

operate at optimal levels. This mean that high levels of productivity must be
achieved, especially in warehousing area. Productivity gains in warehousing are
important to the firm in terms of reduced costs and to its customers in terms of
improved customer service levels.

Productivity is the ratio of real output to real input.

A multitude of warehouse productivity measures are used although they ca be

grouped into major categories such as labor cost per unit handled, amount of space
needed to store each unit, and frequency of errors.