1

Logistics: At the Centre of World Trade

After reading the chapter, the students should be able to

understand:
Concepts, scope and objectives of logistics
Logistics mix (logistics components)
Present and future perspective of logistics
Role of logistics in customer value delivery chain

Processes by which customer demands are met are of critical

importance to an organization. Logistics is the thread that connects
these processes to cost effectively create the time and place utilities
essential for customer satisfaction. Logistics has helped many
successful companies around the world to transform cost
proposition into a value proposition, therefore leveraging the
companies for a competitive edge in the dynamic and turbulent
global market. Several companies are making a paradigm shift by
looking at logistics as an opportunity rather than as a cost centre.
They are leveraging logistics to improve the service level to the
customers, to accelerate the speed of launching new products, and
to enter new markets faster than before within and beyond the
national boundaries.
 in its relationship to strategy, logistics assumes the
character of a dynamic force without which strategic
conception is simply a paper plan
CDR C. Theo Vogelsang, US Navy

1.1 A PARADIGM SHIFT

In the new millennium, globalization is making national economies

more and more integrated into the global economy, world trade is
expanding at an exponential rate, technologies are advancing and
becoming an integrating force, customers are demanding value for
their money, marketers are experiencing competitive pressure, and
businesses are struggling not only for growth but also for survival.
This has forced business organizations around the world to
reevaluate their business processes and the way they deliver the
products and services to their customers. The intense competition
and proliferation of product and service varieties have resulted in
volatility in market demand, and hence it has become necessary for
companies to manage uncertainty. Business firms around the world
have started looking beyond the organizational boundaries to
improve upon cost, quality, reliability, responsiveness, and
relationships to manage uncertainty. In order to survive and
remain profitable, both manufacturing organizations and trading
companies worldwide are concentrating on the core competencies
and are outsourcing peripheral processes and intermediate
products. Global buying and sourcing practices have undergone
total change over the past few years. This has resulted in
international supply chains and innovative logistics management
practices that are vastly superior, both qualitatively and in terms of
scale economies. Products today are sourced from different parts of
the world, assembled at different locations, and shipped to various
destinations to ensure greater customer satisfaction and to
eliminate unnecessary time and cost from the supply chain cycle.
These trends resulted in numerous marketing opportunities
worldwide through expanded global supply chains and enhanced
competitiveness.

The pursuit of growth and the need to access new markets have
been propelling companies around the world to search for a
sustainable competitive advantage. This has led companies to
greater customer consciousness and to the need for cost
effectiveness. The global nature of business has forced companies
to recognize the critical role of back-end operations of a logistics
supply chain in todays dynamic business environment. As business
firms are focusing on production, marketing, and finance, a greater
attention is required to achieve customer satisfaction through
effective and efficient logistics. Due to advancement in information
and communication technologies, logistics has become an integral
part of e-commerce and e-business. Like an army on a war front,
the business warriors on a market front are powerless without a
proper logistics backup. Logistics is a source for core competency
and a tool for developing competitive advantage in todays
customer-driven, market-oriented economies. Hence, business
firms today cannot afford to ignore the crucial role of logistics in
the supply chain of a business, which, if ignored, may be fatal for
the business firm not only for the growth alone but also for survival.

1.2 LOGISTICS DEFINED

The word logistics traces its origin to the Greek word logistikos and
the Latin word logisticus, meaning the science of computing and
calculating. In ancient times, the term was frequently used in
connection with the art of moving armies and supplies of food and
armaments to the war front. The use of this word can be traced
back to the seventeenth century in the French army. But during
World War II, logistics gained importance in army operations as a
term referencing the movement of supplies, men, and equipment
across the border. The US army officially used the word logistics
after World War II. Today logistics has acquired a wider meaning
and is used in business to refer to the movement of raw materials
from suppliers to the manufacturer and, finally, the movement of
finished goods to the consumers.

Logistics is also referred to as a physical distribution. Philip Kotier

defines logistics as Planning,implementing, and controlling the
physical flows of materials and finished goods from point of origin
to point of use to meet the customers need at a profit.1 The
American Council of Logistics Management defines logistics as 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 point of
origin to point of consumption for the purpose of conforming to
customers requirements.2

Logistics management is basically an integrative process which

optimizes the flow of materials and supplies through an
organization and its operations to the customer. Martin
Christopher says that logistics is essentially a planning process
and an information-based activity.3 It is also described by Philip
Scary as the corporate traffic cop directing flow of material from
the source through production and distribution to the final
customer. The ultimate objective of a logistics function is to support
corporate goals by delivering products to the consumer at the time
and place of his choice. However, this objective must be balanced
against the cost of providing service.

1.3 SCOPE OF LOGISTICS

As against the old concept, which was restricted to the army,

logistics has gained recognition in business organizations as an
important business function and as a tool for developing
competitiveness. To an organization how it delivers products and
services to the customerswhether the product may be tangible or
intangibleis of critical importance. The effective and efficient
physical movement of the tangible product will speak about the
intangible services associated with the product and the
organization that is delivering it. In the case of intangible products,
the delivery of tangibles at the right place at the right time will
speak about its quality. Logistics is one of the major enablers of
growth of trade and commerce activity in a country. At a macro
level, the logistical infrastructure, such as modes of transportation,
transportation equipment, storage facilities, connectivity, and
information processing, are contributing to a large extent to the
physical movement of goods produced in manufacturing, mining,
and agricultural sectors. The speed and reliability in distribution
from the place of production to the place of consumption
contributes greatly to the growth of a countrys domestic and
international trade. The logistics costs as a percentage of gross
domestics products (GDP) of various countries are shown in Table
1.1.
Table 1.1 Who Stands Where in Logistics Costs

Country Logistics cost/GDP (in per cent) Share of 3p in overall logis

China, India 1315 <10

US 9.9 57
Europe 10 3040
Japan 11.4 80

Source: KPMG, 2007, Skill Gaps in Indian Logistics SectorA

White
Paper, http://www.scribd.com/doc/456519/Skill-Gaps-in-Indias-
Logistics-KPMG-2007.

It is evident from Table 1.1 that it costs nearly USD 150 billion to
move material from one user to another in India. The key issues are
freights and inventory management. A countrys public distribution
system needs logistical support to deliver the goods to the right
place at the right time for the lowest possible cost. At micro level,
logistics plays a critical role in the value delivery system of a
business organization to provide a superior customer service.
Hence, the mission of a logistical system is to achieve the desired
level of delivered service and quality at the lowest possible cost. The
scope of logistics covers management of material procurement
through manufacturing to delivery of finished products to the
consumer. In a nutshell, any productivity improvement that could
be achieved in any part of a logistics system, whether at macro or
micro levels, would help in cost reduction and proper deployment
of scarce national resources to a productive purpose.

PERVASIVENESS OF LOGISTICS

Logic in Logistics for 30-Minutes Pizza

Ideally, the time taken for registering the order should be one
minute. After that the pizza goes to the guy in the make line. He
takes two minutes, and then oven time is five minutes. When the
pizza comes out of the oven it is inspected. One minute goes into
quality check and packing. Another minute goes in checking the
route and confirming the order one last time.

The moment he is leaving, the delivery boy shouts the

out-of-the-door time, which is normally between 10 and 12 minutes.
Then everybody yells out drive safe. When he returns he punches
the time in. At the end of the day the average delivery time for all
his orders is checked. This helps the manager figure out which
orders were not delivered in time. The next day, the store manager
calls each one of those whose orders got delayed and apologizes.

The essence is process sequencing, just-in-time inventory

availability, and time management for the success in this service
operations logistics.

Source: http://www.agencyfaqs.com/news/interviews/data/68.
html

Twenty-Four Hour ATM

An ATM (automatic teller machine) is not a novelty today.

Invariably, all major banks in India started this service as a part of
the retail finance drive. In fact, foreign banks operating in India
were the pioneers in ATMs in India. However, the lead taken by
ICICI, HDFC, and Citi Bank gave the face-lift to the ATM concept,
as a result of which it has witnessed an exponential growth to over
6000 numbers. The success of ATMs depend on the effectiveness of
the networking. The logistics supply chain for the currency notes
needs to be very efficient so as to ensure the availability of the
currency notes at the stroke of a button. An ATM is a service
product having perishability as the basic characteristic, which
needs to be looked into to satisfy the any time cash need of the
customer who is time starved. The other logistics aspect is the
information on the credit limits available to the customer at any
point of cash withdrawal. Data warehousing and data mining with
automatic updating for real-time information on credit worthiness
are the other essential support systems required for processing the
customer request for cash withdrawal. E-business solution takes
care of the complex transaction processes involved in ATM
operations.

Dabbawalas of Mumbai

Dabbawalas of Mumbai offer a reliable foolproof logistics system of

delivering lunch boxes to over 200,000 office employees every day
without mix up of having the wrong tiffin going to the wrong office
or arriving late, irrespective of conditions such as rains, strikes, and
scorching heat. A team of around 5000 men and women, mostly
illiterate, operate in assigned areas in Mumbai, each handling 25
30 dabbas, which is the optimum lot size as more could create
confusion and affect promptness, which will lead to customer
dissatisfaction. The dabbas are collected from the houses and put in
tiffin racks at a network of 96 railway stations all over Mumbai to
load into the train for further movement toward delivery points.
They use a colour code system on the dabbas to identify the
collection and delivery points. After the lunch hour, the system
operates in reverse direction, again displaying accuracy with
collection and quality of delivery closer to Six Sigma. This system
gives a much cheaper alternative to office workers than having their
food in restaurants and food joints. With this logistics system,
400,000 transactions are done daily with the precision of Six
Sigma accuracy.

Source: Information adapted from MyDabbawala.com.

Laundry Service in Five Star Hotels

The laundry service in a five star hotels is a very simple service

operation that does not use any sophisticated software tools. At 10
a.m., the housekeeping department collects the laundry from 210
rooms of a 300-room hotel operating at 70 per cent occupancy. The
laundry is divided into three parts; staff uniforms, room laundry
(bed sheets, pillow covers), and guest clothes. Special attention is
given to the guests clothes for same-day or express delivery. Every
single piece of clothing is allotted an identification code, and the
information is punched into the computer for tracking, processing,
and final delivery. The entire laundry is handed over to the laundry
service supplier, who collects the laundry in the morning and
delivers to the housekeeping department in the evening per the
customers requirements. This is a simple but effective laundry
logistics operation of a hotel housekeeping department that leads to
customer satisfaction.

Indian Postal Service

Indian Postal Service is one of the largest logistics networks in the

world today that delivers the letters in the most cost-effective way.
The Indian Postal Service operates through a network of 1,52,781
post offices covering 6,09,030 villages, towns, and cities across the
country, delivering 43 million letters every day. They use all
transportation modes available in India for movement of postal
cargo. The collection of letters from 542,781 letter boxes, followed
by sorting, packing, moving, unpacking, and again sorting for final
delivery is a mammoth logistical task that they have performed cost
effectively for the past one and a half centuries.

Source: http://www.diehardindian.com/infra/postal.htm

Gulf War in 1991

After World War II, the 1991 Gulf War was the largest military
operation, lasting for four days. The planning process of logistics
operations was initiated many months before the actual war started.
It involved the movement of over 1,25,000 ground troops to defend
the area, stretching to 175 km long and 300 km deep in the Saudi
Arabian desert. Around 500 tactical cargo trucks and 200 wheeled
vehicles moved into place within the short time frame of two weeks.
The ammunition of 35,000 tonnes, fuel of 5.6 million gallons,
rations of 2 million meals, and drinking water of 1 million gallons
were made available at the appropriate time during the war
operations. Entire logistics operations were based on information
flow, which was based on excellent communication connectivity
across the supply chain using the latest technology. The status of
material, food, maintenance, and manpower to individual supply
chain centres was reported on a daily basis to organize and
facilitate speedy replenishment from the United States and bases in
Europe. The logistics involved were of mammoth scale. However,
efficiency and effectiveness of logistics operations contributed
greatly to the success of the winners.

Source: http://bib.cfc.dnd.ca, http://en.wikipedia.org

Public Distribution System

Food Corporation of India (FCI), a government undertaking, is

handling the massive logistics operations of the procurement,
storage, and distribution of foodgrains throughout the country. FCI
moves around 22 million tonnes of foodgrains over the distance of
1500 km per annum. On an average, 4,00,000 bags are transported
by rail, road, and inland water from the point of production to the
point of consumption for distribution across 4,50,000 fair price
shops spread across the country. On an average, FCI is storing over
23 million tonnes of grains in 1700 warehouses, which are near the
consumption centres at various locations in the country.