OVERVIEW OF LOGISTICS

In terms of approach, it is necessary to create centres of excellence that

nurture specific skills.'
Ford India is also going through a rapid cutting down of vendors. Says
Sandeep Sanyal, Vice President, Supply: 'Right now, we have 83 tier-one
suppliers, which is optimum for the more than 70 per cent localization levels
we have reached. We intend to localize the entire vehicle manufacturing,
keeping supplier numbers double digit' Ford's tier-one bulge isn't very big,.
given that most Indian companies were used to nothing less than a 150-
strong tier one base. In comparison, multinational companies introduced
slimmer tiers-Hyundai Motors, for instance, has a total of 65 tier one and
22-odd tier two suppliers.

Source: The Economic Times, 27 August 2000.

1.1 INTRODUCTION

Since the beginning of the last decade of the twentieth century, there has been a
metamorphic environmental transformation in the business world, which re-
sulted into tremendous growth opportunities in one hand, and more complicated
business problems threating to even survival, on the other.(Numerous brands of
cars and two-wheelers, toilet soaps and shampoos, detergent cakes and pow-
ders, textiles and garments are available against an at least six years' waiting
list for a Bajaj scooter and premium grade Dalda during a festival period. This
is the outcome of heavy industrialization as a consequence of the government's
liberalization policy, rapid innovations in the field of science and technology
along with the emergence of world market as global village. Apart from the
above macro reasons, certain micro reasons are equally responsible for further
intrications, like consumers becoming very selective and conscious about their
purchase decisions, followed by distributorsIretailers' consciousness about their
own return on any investment due to the availability of attractive trade opportu
nities. Hence, in the fiercely global competitive environment as a result of liber-
alization, privatization and globalization of almost all the economies of the
world, it is important for every organization to generate the highest level of
Customer satisfaction, while delivering the highest value to its shareholders. In
Such an erratic marketplace, companies have to put their best eftorts towards
TOrmulating market-oriented and customer-tocused strategies. That is why, de
spite an economic slump in the recent past, companies are increasing their pro-
duct portfolio, with a focus on quick information, prominent display, ready and
intact delivery, 24 hours on-the-spot atter-sales service, eagerness to sort-out
c o n s u m e r s with a difference. But, for
Complaints, etc., in order to satisfy their
on their marketing intermediar-
Such a set of offering, they have rely largely
to
the efficient dis-
qualitative results of marketing largely depend
on
ies, because
acumen of those dealers
who have an ultimate interface with
play of marketing
end-users for a finalsales deal. That is why companies are putting in their best
 MANAGEMENT
SUPPLY CHAIN
6 TEXTBOOK OF LOGISTICS AND

and well motivated

intermediaries happy, loyal
etforts to keep their marketing them as business part-
business and trade and have started recognizing
towards
ners rather than traders. companies need
to the highest value to shareholders,
Additionally, generate of productivity
with an improvement
to cost-etticient best services, coupled
offer of optimum utilization of resources, avoiding idle
and profitability by means
have to present
time for any of them. To attain all of
the above goals, companies
least price as and when required, avoiding
best quality product at a reasonably of Logistics
a stock-out situation which
has given impetus to the concept
in the quality,
to ensure a consistency
Management, since it has the ability
available goods at the place of
tremendous cost-saving potential and making
requirements in time.

1.2 NATURE AND CONCEPTS

Logisticsis a recent addition in the jargon of integrated business management,

formerly with the traditional fields of marketing, finance, production and per-
sonnel, although it has been an integral part of these sectors since the Industrial
Revolution.Business logistics, physical distribution, materials management, out-
bound logistics, in-bound logistics, logistics management, supply chain man-
agement are only some of the terms being used to define and describe the con-
cept of approximately the same subject-logistics, perhaps due to a rapid change
in the scope and wide use of the subject matter.
The term Logistics' stems from the Greek word 'Logisticos', meaning 'the
science of computing and calculating.' Since ancient times, logistics has been
performed but earlier, it was used first within the facet of military science. In the
military sense, Webster defines Logistics as "the procurement, maintenance and
transportation of military materials, facilities and personnel' (Webster's
Dictionary, 1963).
Further, a US Air Force Technical Report (1981) defines this term as 'the
science of planning and
In this most
carrying out the movement and maintenance of forces.
comprehensive sense, logistics pertains to those of
aspects military
operations which deal with: (a) design and
movement, distribution, maintenance, development, acquisition, storage,
(b) movement, evacuation and evacuation, and disposition
of materials;
construction, maintenance, operation, hospitalization of personnel; (c) acquisition or
tion or furnishing of services.' disposition of facilities; and (d) acquisi-
In 1905, Major
Chauncey B. Baker 'That branch of the Art
pertaining to the movement and supply wrote,
of armies is called
of War
Logistics systems and various models were used Logistics.'
World War II to ensure that by military forces during
right place to meet the country's troops and materials made available at the
were
War, it is noted on the first requirements.
phase that US forces
For instance, in a
book of Gulf
million meals during the brief planned, moved, and served 122
the residents of engagement-a task comparable to
Wyoming and Vermont
Topics, 1991). three meals a
day for forty days
allfeeding
(Transport
 1
OVERVIEW OF LOGISTICS

Hence, from a military point of view, logistics refers to a supportive syste

which reflects the practical art of moving armies and materials engaged in com-
bats enemy to achieve the desired results.
Today, in the industrial and commercial world, logistics has acquired wider
meaning. Essentially, it covers activities for the material flow from the source to
the processing facilities, and subsequent distribution of finished goods from there
to the ultimate users. Previously, the term physical distribution was commonly
used, which refers to 'manufacturing and commerce to describe the broad range
of activities concerned with efficient movement of finished products from the
end of production line to the consumers'.
An early definition encompassing the total material flow involves 'a total
approach to the management of all activities involved in physically acquiring,
moving and storing raw materials, in-process inventory and finished goods
inventory from the point of origin to the point of use or consumption' (Lalonde
et al., 1970).
In 1961, in broader sense, this same term has been defined as 'that area of
business management responsible for the movement of raw materials and fin-
ished products and the development of1 aterial system.' (Smykay, et al., 1961)
In 1991, the Council of Logistics Management (CLM), a prestigious protes-
sional organization, modified its 1976 definition of Physical Distribution Man-

agement by first changing the term to Logistics and then changing the definition
as follows:

Logistics is the process of planning, implementing and controlling of effi-

cient, ettective tlow and storage ot goods, services and related intormation
of
from the point of origin to the point of consumption for the purpose
con-

forming to customer expectations.

An engineering-oriented definition of logistics has been given by The Society

of Logistics Engineers (SOLE, 1947), a professional organization, comprising
about of
10,000 practitioners engineering from government, the armed
logistics
forces, and defence-related cooperations,
as:

and technical activities

The art and science of management, engineering,
and supplying and maintaining the
concerned with the requirements, design,
resources to support activities, plans and operations.

management has been given by

A more systematic definition of logistics
Bowersox and Closs (1996) as:

and administration of system to

the design
Logistical Management includes and finished inventory to sup-
control the flow of materials, work-in-process,
port business unit strategy.)

management, a more comprehensive

On the basis of above facet of logistics
definition of it is:
 8 TEXTBOOK OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Logistics management refers to designing, developing, producing and operat

ingan
integrated system which responds to customer expectations by making
available the required quantity of required quality products as and when
required to offer best customer service at the least possible costs.
It is
internal integration of interrelated managerial functions
an
to ensure a
smooth flow of raw materials from the point of inception to the first
production
point, semi-finished goods within production process, and finished goods from
the last production point to the point of
consumption. Hence, a set of activities
which involved in the gamut of logistics include procurement, materials
are

handling, storage and warehousing, protective packaging, order processing, fore-

casting, inventory management, transportation, and related intormation sys-
tem. After careful analysis and review of various
of logistics be
definitions,the major features
management may drawn as:

(i) It ensures a smooth flow of all types of goods such as raw

materials,
work-in-process and finished goods.
(ii) It has the ability to meet customer expectations and
(ii) It ensures the delivery of quality requirements of goods.
(iv) It ofters the best
product.
possible customer service at the least possible cost.
(v) It is an
integration of various
resources.
managerial functions for optimization of
(vi) It deals with movement and
storage of goods in appropriate quantity.
(vii) It enhances productivity and
profitability. )
1.3 EVOLUTION OF THE LOGISTICS CONCEPT
In broader sense, logistics is
a
have developed as a
seen to
from the stage of human society transported
in the socioeconomic self-sufficiency to the era of
exchange which was needed
system. This exchange system had
cept of trading largely due to division of given birth to the con-
tion of the labour, industrialization and urbaniza-
population. Logistics now goes on all
over the
hours of every day, seven
days a week during fifty-two weeks world, twenty-four
nation, regardless of their political a year, in every
Before the 1950s, no formal philosophies.
concept or theory of logistics existed
logistical functions were performed in the but the
tion. The second half of the corporate world without due recogni-
and development in the overalltwentieth century witnessed a
concept and approach towards phenomenal
growth
significant contribution of logistics logistics. Despite
during World War II, many of the
techniques were ignored temporarily logistical
during the post-War surge in economic
activity and the concentration of business
demands for goods. It was activities were on filling the
were
compelled
only
to examine their
during the recession of the 1950s that post-War
the discipline of physical distribution system. And from managers
business logistics has advanced there,
portation dock to the boardroom of from the warehouse and
formation of the leading global
business function itselt, there
trans
enterprises. With the trans
has been
transformation in the
 OVERVIEw OF LOGISTICS 9

INDEPENDENT BUSINESS FUNCTION LIMITED INTEGRATED BUSINESS

(Till 1950s) FUNCTION (1960s-70s)

Manufacturing Manufacturing
Management
InventoryY
Control (Sales)
TRANSFOR. Physical
MATION Material Distribution
Procure- Distri Manage and Sales
ment ment Managementy
bution

OBJECTIVE OUTCOME
Maximization of Aggressive
OBJECTIVE OUTPUT
Cost Control Price-based
Profit by Sales Preaching A
Competition
Volume Skills

Manufacturing
G Management
E S
N
D O TRANSFOR- MaterialX Marketing
E
T M MATION
Manage and
Distribution
R ment
Management

OBJECTIVE OUTPUT OBJECTIVE OUTPUT

| Core Customer Value Maximization of Increased
Competency and Harmonious Profitable Sales Productivity.
Relationships Volume and Profitability and
Cost Reduction Market Share

EXTERNALLY INTEGRATED INTERNALLY INTEGRATED

BUSINESS FUNCTION (1990s Onward) BUSINESSs FUNCTION (1980s)
(Supply Chain Management) (Logistics Management)

Fig.1.1 Evolution of the Logistics Concept

Source: D.K. Agrawal (2001), 7Ms to Make Supply Relationships Harmonious',

Chain
Processes and Organizations-Emerging
Froceeding of National Conference on People,
Realities, January.
 10 IENTROOK OFLOGISTCS AND SUPPLY CHAIN MANAGEMENT

logistics shown in Fig. 1.1, which has been systematically divided

concept of as

into four phases, namely:

Function Era (Till 1950s),

(i) Independent Business
() Limited Internally Integrated Business Function Era (1960-70),
Function Era (1980s), and
( ) Fully Internally Integrated Business
(Iv) Externally Integrated Business Function Era (1990s).

Imdependent Business Function Era (Till 1950s)

During the early phase of the industrial growth, emphasis was on the problems
of production, mainly due to characteristics of economy of abundance. Compa-
nies were under tremendous pressure to increase production capacity due to high
demand created by war-time shortages, followed by very limited number of
players. That is why, the genesis of various principles of scientific management
in the latter part of the nineteenth century and early twentieth century contri-
buted signiticantly in resolving production problems.
In such an environment of technical capacity for mass production, produc
tion-led business functions dominated the whole enterprise, which may reflect
the managerial mindset of capacity creation, work methods, volume of
tion and their storage and
produc-
transportation. Hence, in this stage, logistical func-
tions were limited
only to warehousing and transportation of raw materials andd
finished goods. Furthermore, this era reflected independent business
each and every function such
function, because
procurement, inventory, production, sales and
as
distribution all
independently performed. For instance, the attitude was
were
such that the sales department would sell whatever the
words, the function of sales department was
plant produced. In other
simply to sell the
company's pro-
duct, at a price set by the production and financial
The objective of this stage was to maximize managers.
the profit by a
maximization of sales volume by means of correspondinng
skills of the salesforce. This aggressive selling and preaching
stage was the phenomena of till the 1950s.
Limited Internaly Integrated Business Function Era (1960s-70s)
With the beginning of the 1960s, corporate enterprises started
ficulties inthe marketplace while
converting their
experiencing dit
due to three reasons: products into cash, mainly

(a) a large number of new

tive environment;
players entering in the market resulted into
compet
(b) the recession of
1958; and
(c) the demand for most of
rated and resulted into a consumer and infrastructural goods became satu-
profit squeeze.
In order to overcome the
terprises started prevailing competitive environment,
searching for new tools and corporate en-
techniques for most efficient cost
 OVERVIEW OF LOGISTICS 11
control systems. At the same time, they also realized
logistics were activities whose costs had neither been physical
and that distribution
coordinated. In fact, this era had carefully studied nor
Prior to the period of given a real
impetus to the concept of logistics.
1960s, activities such as procurement, inventory or
materials, work-in-process and finished raw
and goods, storage and warehousing, trattic
transportation, etc., were performed in a fragmented manner and caused
poor pertormance and high costs. But in this era of functional
during the period of 1960s and 1970s, two limited management
internally
functions-materials management and physical distribution integrated business
coined in the jargon of business management-were
like finance, personnel, sales, management addition to traditional functions
in

ment refers to planning,

production. The concept of materials manage-
implementation and control of activities responsible for
the flow of materials into an
organization. In other words, materials manage-
ment involves functions like order
and
placement, procurement of raw materials,
components, work-in-process, their
tion, storage, etc. On the other hand, inventory levels, in-bound transporta-
physical distribution management deals
with planning, implementation and control of activities referring to the flow of
finished goods from the last point of
included functions like out-bound production to the ultimate users, i.e. it
bution warehousing, order
transportation, protective packaging, distri-
processing, inventory level of finished goods and
customer service.
The major objective behind the above
costs
managerial
involved in the above two functions which were steps to be
was to control the
costs of raw materials. For
supposed next to the
instance, a firm could use a speedier mode of trans
portation, despite its high costs, in order to reduce total logistical costs by reduc-
ing the inventory-carrying cost, warehousing cost, protective packaging cost
all to ensure ready delivery and better customer
service. It ultimately prevented
a stock-out situation and
generated sales due to the impulse-buying
the buyers. Furthermore, an analysis could now be conducted in antendency
of
manner so that cost trade-offs between the different
integrated
functions, transportation
and inventory could be deliberately
explored and exploited. Due to the above
significant contributions, these material management and physical distribution
management functions that emerged during this period often resulted into their
own pyramid of organizational structures that reported to the various manage-
ment heads.
he objective of this era was to control costs and output was the survival of
the firm in the competitive market due to their price-based competitive
capabiliry.
Internaly ntegrated Business Function Era (1980s)

With the beginning of 1980s, business situations became more eritical as both
external and internal forces continued to generate change in the business func-
tions mainly due to the following reasons:

(a) transportation could no longer be considered to be a stable factor in the

business planner's equation, as fuel prices continuously soared owing to the
 CHAIN MANAGEMENT
12 TEXTBOOK OF LOGISTICS AND SUPPLY

carrier transporta-
by deregulation of
common
OPEC oil embargo followed
tion; and resulted into significantly
unprecedented rate
(b) inflation continued at an

higher interest rates;

almost at a peak and it was very difficult to
(c) production productivity
was

further 'cream the fat' in the production function; andd

of most of the countries,
in the economic system
(d) there was a gradual change
multinational operations.
especially with regard to
in the quantum of competition in
The entire situation had further increased
firms were continuously experi-
the marketplace. Under above market scenario,
costs and compelled managers to
encing multiplying distribution and operating
their logistical costs by increased
recapitulate and analyse further reduction in
distribution functions in particu-
integration of business functions in general and
lar. That is why many managers were of the opinion that material manage
functions should
be
ment, manufacturing management and physical distribution
integrated and the term logistics became the common way to describe the whole
there had been a
activity of storage and movement. This, the early 1980s,
in
shift in the positioning of physical distribution and material management func-
tions to an integrated logistics management which combined distribution, manu-
facturing and material management functions in order to have a synchronized
system which would ensure a smooth flow of all kinds of goods.
Integrated logistics refers to a set of activities concerned with the flow of all
materials, information and control system. In an integrated logistics system,
there is an interface between traditional activities of physical distribution and
material management along with other functions of marketing and manufactur
ing such as production planning and scheduling, sales forecasting, inventory
management, and customer service.
Several studies were conducted in the United States during the 1980s, to trace
the development of the integrated logistics
organizational structure. A study by
A.T. Kearney Study in 1981 found that the distribution
transitioned through three stages:
(Logistics) department

Stage One:
Management views its mission as controlling the finished goods
transportation and warehousing management has been operation orientation.
Stage Two: Management's mission is to integrate finished
and control in-bound goods distribution
individual
transportation. The orientation here is
managerial, where
activities are planned and controlled as
distribution process. The managers seek part of a complete physical
ancing trade-offs. opportunities for improvement by bal
Stage Three: Management's mission is to
a integrate the total logistical process as
part of the complete corporate endeavour. The
management's orientation
to strategic issues like
evaluating basic changes in the company's turns
operations strategy and pursuing opportunities logistics
environment (Kearney, 1984). presented by charges to the externa"
 OVERVIEw OF LOGISTICS 13

Internal integration of logistics activities became very popular and wide-

spread in the corporate world during the mid 1980s. So, the National Council or
Physical Distribution Management encouraged the trend by changing its name
to the Council of Logistics Management in 1985.
The major objective behind the
development of an integrated logistics man-
agement system was cost reduction, which reflects maximization of profitable
sales volume by means of a high
degree of coordination between various mana
gerial functions. The output of the era contributed a lot in the overall perfor-
mance of corporate
enterprises in terms of increased productivity, protitability
and market share.

Externally ntegrated Business Function Era (1990s)

With the beginning of the 1990s, the overall business scenario became more
critical, mainly due to the following sea change in the environmental factors:

(a) Liberalization of almost all the economies of the world for movement of
goods from one country to another resulted into world-class competition in
the market. In such an environment of buyers' market, a new pattern for
survival emerged by providing the most value for the lowest cost, i.e. in
terms ofbest quality product at least costs. Firms started adopting the con-
cept of Total Quality Management (TQM) widely throughout the industry.
The idea of zero defects in products and services quickly purvated in the
logistical operations in the form of in time and intact delivery. Quality
Gurus like W. Edwards and Joseph M. Juran have helped managers globally
under 'Quest for Quality'.
(b) Rapid innovations in the field of science and technology, particularly infor-
mation technology, has completely changed the corporate mindset trom
safety-stock mechanism to real-time response mechanism by means of rapid
communication and exchange of data.
c) New inventory management techniques like MRP, DRP and JIT became
popular instruments to efficiently plan and deploy inventory items through-
out the complex and multi-level networks, preventing stock-out situation
without enough safety-stock, resulting into further curtailment of logistical
costs in general and inventory costs in particular. For this particular pur-
the most reliable, quality conscious and limited
pose, firms need to have materials and components with the capability to
number of suppliers of raw
meet requirements at a short notice.
increase in the quantum of competition,
tirms need to long-
have
(d) Due to
term unbeatable core competency or competitive advantage.
That is why, it
to keep their immedi-
has become need of the hour for corporate enterprises
ate customers (marketing intermediaries) happy,
loyal, and well-motivated
towards trade by offering their best services as quality, price, and prom0
more due to the rapid imitation
tion do not bring any competitive edge any
started recognizing custom-
with additional features. So, logistics managers
mere traders.
ers as their business partners as against
14 TEXTBOOK OF LOGISTICS AND SUPPL.Y CHAN MANAGEMENT

(e) Furthermore, emergence of third-party logistical service provider changed

the entire concept of the transport industry from mere transporters to logis.
tics service solution providers, contributing significantly in the success of
logistics system. That is why, in 1990s, there has been a considerable growth
in the third-party logistics service industry who provide value-added logis.
tics service to the corporate world and allow them to concentrate on their
core competencies in the field of production and marketing.

Hence, due to the above-mentioned reasons, the organizations' structure emerg

ing following the logistics activities in the 1990s follows the pattern of external
integration, which has given impetus to the concept of Supply Chain Managemenr
According to Lisa M. Ellram and Martha C. Cooper (1990), "Supply Chain Man-
agement extends this concept of functional integration beyond the firm to all firms
in the supply chain, bringing the concept of integration into the 1990s."
So, the majorobjective of this era is the core competency by means of further
streamlining the logistics system with other supply chain members so as to achieve
lever of
a
higher and to reduce financial risks. The output of this
specialization,
era is the maximization of customer value and harmonious
long-run relation-
ships between all supply chain members.

1.4 LOGISTICAL MISSION AND STRATEGIC ISSUES

The logistical system of a firm refers to an

integrated effort towards generating the
highest value of customer satisfaction at the least cost while delivering the highest
value to its shareholders. Hence, the major missions of
logistics are as follow:
i) To make available the right
time and
quantity of right quality products at the right
place in the right physical condition,i.e. the mission ot
making available goods and services to customers as per their logistics
is

and specifications. Hence, firms need to requirements

ensure timely and intact
goods. delivery of

(ii)/To offer the best possible customer service for core

days scenario of intense global competency. In the present
service from trade, competition, for further growth and more
corporate enterprises have to
(marketing intermediaries) because theylargely depend on their
customers
are having final
face with end-users and the final
sales deal is swung inter
Hence, firms need to keep their customer by their push ettorts.
motivated towards trade. For this
purpose, firms have to offer their best services
three broad categories of service to their customers in terms or
components, namely;
(a)
Strategic Components: These
components reflect the vision of the top
management of the company towards
terms of relationships with their customers 1n
their ability to ensure the best return against the investment
space provided and push efforts mades
required for generating sales, their commi
ment for long-run association
in the service standard and along
with continuous effort for
improvement
transparency and uniformity in operations.
 OVERVIEw OF LOGISTICS 15

(b) Logistical Components: These components deal with basic services i

quired for delivery of goods, including availability of goods as per normal
and unforeseen requirements, fixed replenishment cycle-time, zero-defect
delivery, prompt reverse logistics system for early recovery from detective
delivery, point-to-point information along with consistency and reliability
in their services.
(c) Non-logistical Components: These service components basically refer to
value-added services offered to customers in terms of financial and techni-
cal support for infrastructural
development, credit facility on special occa-
sions, training for sharpening their marketing and managerial skills,
discre
tionary power for warranty settlement and proper follow-up of the exclusive
territory operation norm, if any.
Hence, the service mission of logistics reflects the ability of the firm to
exploit the marketing acumen of their marketing intermediaries to bring
about a competitive advantage.
(ii) To minimize total logistical costs. Normally,
to 45 per cent of the
logistical costs range from 15
price of the product next to the costs of raw-materials
for most of the goods.In certain cases, it
may be about 5 per cent, whereas
for others, around 200 per cent, Hence, there is
ment of these costs by means of
enough scope for curtail-
having better coordination and integration
of various logistical and
non-logistical functions of an enterprise along with
higher level of productivity. New approaches towards total logistical cost
offer ample opportunity for more
comprehensive analysis and understand-
ing of logistical cost components and identified ways and means to slash it
further. However, the implementation of effective
remains a
logistical process costing
challenge in the 1990s. Many long-standing practices of account-
ing continue to serve as barriers to fully implementing total-cost
solutions. logistical

Furthermore, there must be a trade-off between total logistical cost and re-
quired customer service level.
In order to achieve the above
logistical missions, the following strategic is-
sued are important for the smooth and efficient
logistical activities in the Indian
environment at the beginning of the twenty-first century:
1. Decision-makers to realize the importance ot arranging inputs to manutac-
turing, trading or service activity.
2. Increase the status of purchase or SCM. Provide motivation tor
better per-
sons to choose SCM as career.
Educational institutions are astarting point
and, therefore, a major role.
.3.
Adopt a harmonized system of codification to identity the products.
4.
Improved vendor relations is a part of cultural change and, therefore, the
joint responsibility of the top management.
S.
Logistics problem requires multiple solutions, depending on the type of