CHAPTER ONE

AN OVERVIEW OF LOGISTICS & CHANNEL MANAGEMENT

Objectives of the session
At the end of the session the learner will able to Explain the concept of:-
 Define logistics management
 Identify the role and objective of logistics management
 Understand the system concept and the total cost approach as they apply to
logistics
 Understand the common boundaries between logistics and channel management
Introduction
All organizations move materials. Manufacturers build factories that collect raw
materials from suppliers and deliver finished goods to customers; retail shops have
regular deliveries from wholesalers; Logistics is the function that is responsible for
this movement. It is responsible for the transport and storage of materials on their
journey between suppliers and customers.
1.1 Definition of logistics
many people believe that logistics is a word, but from a semantics point of view its
origin was from ancient Greek and meant the “science of computation.” In fact, it is
originally from combat environments and not from business or academia. It seems the
ancient Greeks referred the word logistics to military officers who were expert in
calculating the military needs for expeditions in war.
Logistics has been called by many names including; channel management,
distribution, industrial logistics, material management, physical distribution, supply
chain management and transportation management.
Logistics is the function responsible for all movements of materials through the
supply chain.
“The branch of military science having to do with procuring, maintaining, and
transporting material, personnel, and facilities. “This definition puts logistics into a
military context. To the extent that business objectives and activities differ from those
of the military, this definition does not capture the essence of business logistics
management.
According to the Council of Logistics Management (2003) “Logistics is the process of
planning, implementing and controlling the efficient, effective forward and reverse

Page 1
flow and storage of goods, services, and related information between the point of
origin and the point of consumption in order to meet customers’ requirements”.
Logistics is not confined to manufacturing operations alone it is relevant to all
enterprises including services.
 Logistics is... the management of all activities which facilitate movement and the
co-ordination of supply and demand in the creation of time and place utility.
 Logistics is the art and science of managing and controlling the flow of goods,
energy, information and other resources. (Wikipedia, 2006)
 Logistics is... the positioning of resource at the right time, in the right place, at the
right cost, at the right quality.
An appropriate modern definition that applies to most industry might be that logistics
concerns the efficient transfer of goods from the source of supply through the place of
manufacture to the point of consumption in a cost-effective way whilst providing an
acceptable service to the customer.
1.1.1 Objectives of logistics
To achieve logistical integration, six operational objectives must be simultaneously
achieved: The relative importance of each is directly related to a firm's logistical
strategy. These objectives are:
1. Responsiveness (firm's ability to satisfy customer requirements in a timely manner
E.g. IT)
2. Variance Reduction
3. Inventory Reduction
4. Shipment Consolidation
5. Quality
6. Life cycle Support: give guarantee to protect from damage and expired.
1.1.2 Process of Logistics:
Logistics is the function responsible for the flow of materials from suppliers into an
organization, through operations within the organization, and then out to customers.
The entire process of logistics, which deals with the moving of materials into,
through, and out of a firm, can be divided into three parts:
 Inbound (inward) logistics, which represents the movement and storage of
materials received from suppliers;
 Materials management, which covers the storage and flows of materials within
a firm; and

Page 2
 Outbound (outward) logistics or physical distribution, which describes the
movement and storage of products from the final production point to the
customer.
Materials are all the things that an organization moves to create its products. These
materials can be both tangible (such as raw materials) and intangible (such as
information).

Operations within the organization

Internal supplier internal customer
External
External
supplier
customer
Materials Management
Inbound Outbound
Logistics Logistics
Logistics
Figure 1.1 the process of logistics

1.1.3 Five Key Issues for Logistics Effectiveness

Five Key Issues for Logistics Effectiveness
1. Movement of product 4. Cost
2. Movement of information 5. Integration
3. Time/service
1.2 The role and importance of logistics
1.2.1 Role of Logistics
Its essence the movement of the right amount of the right product to the right place at
the right time.
Remember the What, Where, When and Why of the economic utilities.

Page 3
What – Form Utility;- Refers to the value added to goods through a manufacturing ,
production or assembly process. For example, breaking bulk and product mixing
changes a product’s form by changing its shipment size packaging characteristics
Where – Place Utility;- Logistics extends the physical boundaries of the market area,
thus adding economic value to the goods. This addition is known as place utility.
When – Time Utility;- Goods and services must be available when customers
demand them. By having goods and services available when it is needed creates time
utility
Why – Possession Utility;- Possession Utility is primarily created by the marketing
activities related to the promotion of goods and services. It increases the desire in a
customer to possess a good or to benefit from a service.
1.3.2 The Importance of Logistics/Supply Chain
Maintaining competitive edge;-logistics provide a competitive edge against other
organizations. A business should strive to provide shipments of merchandise in a
more accurate and fast manner than competitors do. The Internet has made it possible
for many companies to do this.
Building Good Consumer Relations;- Providing product in an efficient manner,
which business logistics helps to do, also helps to build good consumer relations.
Creating Finished Product;- A business needs to ensure there are enough raw
materials available to make finished products. Without quality goods, a business
cannot make quality product. Having enough products stocked is also necessary for
supply and demand purposes and to maximize customer satisfaction
Value;- According to studies conducted for the US economy, logistics costs rank
second only to the cost of goods sold. Value is added by minimizing these costs and
passing the benefits to the customer and the firm’s shareholders.
Impact on cash earnings;- Shareholder Value is represented by Profitability (which
is a relation of Revenue and Cost) and Invested Capital (represented by Working
Capital and Fixed Capital).
1.3 Logistic systems, costs and components
1.3.1 Logistics systems
The systems concept is an analytical framework that seeks total integration of
components essential to achieving stated objectives. The components of a logistics
system are typically called functions. The goal of systems analysis methodology is to
create a whole or integrated effort, which is greater than the sum of the individual

Page 4
parts or functions. Such Integration creates a synergistic interrelationship between
functions in pursuit of higher overall achievement. In systems terminology,
functional excellence is defined in terms of contributions a function makes to the
overall process as contrasted to isolated performance in a specific area.
1.3.2 Logistic costs
Calculating logistics costs in manufacturing companies may be a real challenge as
logistics procedures are usually integrated in the general production processes. Thus
logistics costs and performances are difficult to be identified exactly and the logistics
oriented elements of production costs may remain unknown. Applications of product
costing in manufacturing concentrate often on the activity based costing methodology
as one of the realizations of operative cost calculation. The corresponding models are
proposed mainly for complex production systems and can be used for production
planning effectively. Some attempts of integrating some specifications of logistics
(mainly procurement or inventory) into manufacturing costing models can also be
found in the literature. Nevertheless, no comprehensive solutions of logistics costing
in manufacturing environment are yet available. Logistics costing can be set up as an
integrated part of the operative manufacturing cost calculation system.
1.3.3 Logistics components
There are major six activities to be discussed of it importance.
1. Inventory management
2. Storage and Warehouse
3. Packaging
4. Materials Handling
5. Transportation
6. Order Processing
1. Inventory Management
It 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).
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.
So managers have to decide, whether they need additional products in a given
market and, if so, how many of which items.
2. Transportation;

Page 5
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.
3. Material handling
Materials handling is concerned with the movement of goods within the store
(space). It would focus on the systems needed to move goods into, through, and out
of each facility.
4. Order processing
Processing the order received from the customers is an activity, which is very
important by itself and also consumes a lot of time and paper work. It involve steps
like checking the order for any deviations in the agreed or negotiated terms, price,
payment and delivery terms, checking if the material is available in stock,
producing and scheduling the material for shortages, and also giving
acknowledgement to the owner, by indicating any deviation.
5. 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.
6. Warehousing
This serves as the place where the finished goods are stored before they are sold to the
customers finally. This is a major cost center and improper warehouse management
will create a host of problem.

Page 6
1.3 The output of logistic system
Product availability; Percentage in stock
Order cycle time; Elapsed time from order placement to order receipt
Distribution system flexibility; Response time to special request
Distribution system information; Speed, accuracy of response
Post-sale product support; Response time in providing product support
 Performance measures are the foundation for initiating logistics operations
transformation.
The four broad categories by which companies evaluate logistics performance
measures are:
1. Logistics cost (e.g., expenses and return on assets)
2. Logistics productivity (e.g., orders shipped per hour and transport container
utilization)
3. Logistics quality (e.g., inventory accuracy and shipment damage)
4. Logistics cycle time (e.g., in-transit time and order entry time)
1.4. LOGISTIC COST MANAGEMENT
logistic costs are the costs concerning all activities from attempting to provide a
product to the moment it is delivered to the customer and they are composed of the
costs of storage, packaging, preparation for shipment, transportation,
assembling and all relevant service costs and the costs of preparing in voice,
transaction recognition and collection.
logistic cost management is the preparation of product based cost and income
analysis of the planned logistic activities. Logistics management has two dimensions
for the market (external environment) in one aspect and for the enterprise
(internal environment) in another aspect.
1.5 Four Key Areas of Interface between Logistics and Channel Management
Channel management is involved with the administration of all of the major channel
flows (product, negotiation, ownership, information, and promotion), whereas
logistics is concerned mainly with the product flow. But logistics management and
channel management are very closely linked and interdependent. Because a well-
designed and administered marketing channel cannot exist without an efficient flow
of products to the channel members and final target markets, in the right quantities
and at the
1. Defining logistics service standards

Page 7
Generally manufacturer that provide higher service standard will incur higher costs. A
manufacturer must cover the costs either indirectly in the price it charges for products,
or by passing them along to channel members in the form of service charges. In either
case, there is little e point in offering logistics services that channel members do not
want or higher levels of service than they desire.
Types or levels of logistics service that go beyond real channel member demands
simply increase costs for channel members without providing them with any desire
benefits. 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.
In sum, the development of logistics service standards should not be based solely on
the views of the manufacturer; channel members’ views should also be incorporated.
If this is done, the set of logistics service standards developed by the channel
members actually want rather than what the manufacturer may think they want.
2. Evaluating logistics program
In short, it is the channel manager’s job to make sure that the program the experts
prepare is really what the channel members want. Logistics programs that are
carefully designed to focus on meeting customer service requirements can play a
major role in promoting channel member support.
3. Selling the channel members on the logistics programs
A word of caution! Changes in (physical) distribution must be palatable to the
company’s customers (channel members). Changes which provide cost benefits only
to the manufacturer without corresponding benefits to customers may be more
difficult to implement than those that offer incentives to customers to change.
4. Monitoring the logistics system
The most effective way of monitoring channel member reactions is to conduct a
survey of a sample of channel members. If the number of channel members is small, it
may be feasible to include all of them. The survey dealing with the logistics program
may be conducted as part of an overall marketing channel audit or separately. In
either case, the key areas of customer service at which the logistics program was
aimed should be examined.

Page 8