Chapter 01 - Logistics and The Supply Chain

Economic Issues related to Logistics

Economic utility – the value or usefulness of a product in fulfilling customer needs or wants. There are four general types of economic utility; however, logistics contributes to the place and time utility:

    • Possession utility – the value or usefulness that comes from a customer being able to take possession of a product.
    • Form utility – product’s being in a form that (1) can be used by the customer and (2) is of value to the customer.
    • Place utility – having products available where they are needed by the customers; products are moved from points of lesser value to points of greater value.
    • Time utility – having products available when they are needed by customers.

*Note: It is important to know that even if all these utilities are satisfied, the customer satisfaction is not guaranteed (Valentine’s Day Example) pg.5.

Logistics Definition

The latest definition for logistics by CSCMP: “Logistics is that part of SCM 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 point of consumption in order to meet customers’ requirements.”

Various terms have been used to describe logistics such as:

  • Business logistics
  • Distribution
  • Industrial distribution
  • Logistics
  • Logistics management
  • Materials management
  • Physical distribution
  • Supply chain management

These terms are similar to what logistics is but they are not the same. For more info read end of pg.5.

So what does the definition mean?

1.       The definition says that it is part of the supply chain management- this means that supply chain involves a bigger process which engages different organizations; however, logistics determines how well or how poor an individual firm can achieve their goals.

2.       It is part of SCM that plans, implements, and controls – this means that logistics must cover all these areas not just one or two.

3.       It also mentions the efficient, effective, forward and reverse flow and storage – this means “How well does the company do what they ay they are going to do?”

4.       goods, services, and related information between the point of origin and point of consumption – this means that information about what you are delivering is as important as the delivery itself.

5.       to meet customers’ requirements – means logistics strategies should be focused on customers’ needs and wants .

Reverse Logistics (opposite to Forward Logistics) is "the process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.

Mass Logistics is when companies use one logistics approach to target ALL their customers.

Tailored Logistics is when companies use various logistics approach to target various groups of their customers.

Reasons for the increased importance of Logistics

1. A reduction in economic regulation – US was posing less regulation on logistics activities and this made it possible for logistics managers engage in tailored logistics and also reduce their transportation costs by leveraging amounts of freight with a limited number of carriers.

2. Changes in consumer Behavior

- Market Demassification – this means that people more and more have customized wants and needs so mass logistics cannot be used

- Changing family roles – from the 60’s more women have entered the workforce and they have pushed to have a convenience shopping experience. This includes home deliveries, more extended store hours etc.

- Rising customer expectations – People constantly want more, and this means that satisfactory level of performance must be kept up to date with the customer expectations.

3. Technological Advancements – Development of various technological tools to handle information have been created so that it is getting easier to control and disperse information. Here the Internet has increased the importance of logistics because it has enabled people to communicate all over the world and this has increased the effectiveness and efficiency of logistics.

4. The growing power of retailers – Powerful retailers such as Wal-mart, Home Depot, Best Buy have large market share and low costs and they have superior logistics. For this reason they are considered as “trend-setters” of logistics.

5. Globalization of Trade – it is important to know here that international logistics costs more time and money than domestic logistic. Globalization of Trade is made possible because of the globalization of logistic services.

The Systems and Total Cost Approaches to Logistics

Systems approach – indicates that company’s objectives can be realized by recognizing the mutual interdependence of the major functional areas of the firm, such as marketing, production, finance, and logistics.

Implications of the systems approach:

  • One logistics system does not fit all companies
  • Stock-keeping units (SKUs) or line items of inventory (stocks of goods that are maintained for a variety of purposes)
    • From logistics perspective – the proliferation of SKUs means more items to identify, store, and track.
Control over the flow of inbound and outbound mobevements

Intrafunctional logistics – coordinating inbound logistics, materials management, and physical distribution in a cost-efficient manner that supports an organization’s customer service objectives.

Inbound Logistics: Movement and storage of materials into the firm.

Materials Management: Movement and storage of materials and components within a firm.

Physical Distribution: Storage of finished product and movement to the customer.


Logistics Managers use the total cost approach to coordinate inbound logistics, materials management, and physical distribution in a cost-efficient manner. This means that all relevant activities should be considered as a whole, not individually. Use of this approach requires understanding of cost trade-offs, in other words, changes to one logistics activity can cause some costs to increase and other to decrease. This is also referred to as a total logistics concept.

Logistics Relationships within the Firm

Logistics vs. Finance – There are a lot of issues where the logistics department must interface with the finance department mainly because logistical decisions are only as good as the quality of cost data which they are working.

Example: The logistics department needs forklifts and other materials to do day to day activities, so they must report to the finance department when they make the capital investments budget.

Logistics vs. Marketing – Marketing places n emphasis on consumer satisfaction, and logistics strategies can facilitate customer satisfaction through reducing the cost of products, which can translate into lower process as well bringing a broader variety of choices closer to where the customer wishes to buy or use the product. Logistics can be used to differentiate the company from other companies.

Marketing Mix (4 P’s):

Place: It is very important that products are on the right place. This is important for both departments the marketing people and the logistics people. If a manufacturer is not able to provide a certain product at the right time, in the right quantities and in an undamaged condition, the channel members may end their relationship with the supplier.

Price: a firm cannot be profitable if it does not take into account its logistics costs. The price of a product must cober production, marketing, distribution, and general admin costs. Some companies decide to raise the cost of the products in order to include their higher logistics costs, but this is not very attractive. Another option to this is to decrease the quality of the product but keep price the same. Or the company can absorb these costs itself.

There are other costs associated here, like inventory costs, transportation costs etc. If you want to read more go to pg. 15.

Product: Here one should know that there are a lot of interfaces between the marketing and logistics ppl in terms of how many units of products they want to have in stock, how many in the inventory, etc.

Promotion:  many promotional decisions require close coordination between marketing and logistics. One important situation is the availability of highly advertised products when the company has pricing campaign that lower the price of certain products. It can be very bad for a company to have a stock-out when these powerful ads are displayed everywhere about certain products.

Logistics vs. Production

The most common interface between production and logistic involve the length of production lines. Do you want long production runs or shorter ones? This means, do you want to have more inventory and more products in stock, or do you want to risk and produce less in the short run?

Marketing Channels

Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.

The main actors in the marketing channel: manufacturers, wholesalers, and retailers. Each of them assumes an ownership of the inventory of goods:

    • Ownership channel (movement of the title to the good)
    • Negotiation channel (buy and sell agreements are reached)
    • Financing channel (handles payments for goods)
    • Promotions channel (promoting a new or existing product)
    • Logistics channel (handles the physical flow of product)

The Logistics Channel:

Sorting function – rearranging the assortment of products as they flow through the channels toward the customer. It has four steps which take place between the manufacturer and the customer (performed by wholesaler, retailer, or specialist intermediaries):

-   Sorting out – sorting a heterogeneous supply of products into stocks that are homogeneous

-   Accumulating – bringing together similar stocks from different sources

-   Allocation – breaking a homogeneous supply into smaller lots

-   Assorting – building up assortments of goods for resale, usually to retail customers

Facilitators or channel intermediaries are people who take part in the communication process between wholesalers and other actors. One example might be translators.

Activities in the Logistics Channel

Activities that are considered to be logistics related include, but are not limited to:

  • Customer service
  • Demand forecasting
  • Facility location decision
  • Industrial packaging
  • Inventory management (cost of carrying/holding, cost of ordering, and cost of being out of stock)
  • Materials handling
  • Order management
  • Parts and service support
  • Production scheduling
  • Procurement
  • Returned products
  • Salvage and scrap disposal
  • Transportation management
  • Warehousing management