Chapter One

An Overview of Logistics

ITC
Learning Objectives

By the end of this Chapter, you should be able to:

 1.1 To discuss the economic impacts of logistics
 1.2 To define what logistics is
 1.3 To analyze the increased importance of logistics
 1.4 To discuss the systems and total cost approaches to logistics
 1.5 To expose you to logistical relationships within the firm
 1.6 To introduce you to marketing channels
 1.7 To provide a brief overview of activities in the logistics channel
 1.8 To familiarize you with logistics careers
 Economic Impacts of Logistics

• There are two perspectives of the economic impact of Logistics:

 First Perspective: “Macroeconomic impacts”
 Second Perspective: “Individual impact (Economic utility)”
o Possession utility
o Form utility
o Place utility
o Time utility

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First Perspective: Macroeconomic

From a macroeconomic perspective: (presents logistics costs in relation to gross

domestic product (GDP) for a select group of countries.

Logistics is most definitely an important component in any country’s economy.

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 5

• So,
 What is Gross Domestic Product (GDP)?
 What does this (% of GDP) means to you?
 What is the total logistics costs by value-added activity?

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 6

What is Gross Domestic Product (GDP)?

• Measures the value of economic activity within a country.

• Defined:
 is the sum of the market values, or prices, of all final goods and services produced in an
economy during a period of time.

• Example:
 Let's say Country B only produces bananas and backrubs.
 For Year 1:
o The GDP for the country in this year equals (quantity of bananas X price of
bananas) + (quantity of backrubs X price of backrubs) or (5 X $1) + (5 X $6) = $35.

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 7

• In general,
 macroeconomists use a standard set of categories to breakdown an economy into its
major constituent parts; in these instances:
o GDP is the sum of consumer spending, investment, government purchases,
and net exports, as represented by the equation:
 Y = C + I + G + NX
 Consumer spending, C,
• is the sum of expenditures by households on durable goods,
nondurable goods, and services. Examples include clothing, food,
and health care.
 Investment, I,
• is the sum of expenditures on capital equipment, inventories, and
structures. Examples include machinery, unsold products, and
housing.
 Government spending, G,
• is the sum of expenditures by all government bodies on goods and
services. Examples include naval ships and salaries to government
employees.
 Net exports, NX,
• describes the difference between exports and imports.

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 8

What does this (% of GDP) means to you?

• Logistics costs as a percentage of GDP vary significantly by country.

• In other words:
 Why should you care?
o Efficient and effective logistics can give your company a competitive advantage by lowering the total landed
costs of products.
 For the U.S., logistics costs have been around 8% of GDP Gross Domestic Product (GDP) in recent
years, equal to $1.56 trillion dollars in 2020.
 By contrast, in China, logistics costs average almost 15% of GDP, nearly twice as high as in the U.S.
• More efficient logistics in the U.S. help offset China's labor cost advantage.
o Lower logistics costs also free up money to invest elsewhere in the economy.
o The numbers show that logistics is a huge industry—and both an economic driver and a creator of jobs.

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 9

What is the total logistics costs by value-added activity?

• Logistics costs have been around 8%
of GDP Gross Domestic Product
(GDP) in recent years, equal to $1.56
trillion dollars in 2020.

• For the U.S., motor carrier transportation is

the biggest single expense category.
• Almost every freight item in the US
is on a truck for at least some part of
its journey.
• These costs vary from country to country,
• with emerging markets spending
relatively more on inventory due to
their less efficient transportation and
road systems.
• Poor Infrastructure creates greater
uncertainty in lead-times for
shipments and higher levels of
obsolescence.

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 10

• More specifically, Logistics can play an important role in a

nation’s economic growth and development.
 For example:
o Relatively high logistics costs (as a percentage of gross
domestic product (GDP) restricts economic development
China: the high costs of highway transportation have
severely constrained the growth of China’s e-
commerce market.
o India: growth of e-commerce sales challenged by
logistical inefficiencies to include poor roads and inferior
transportation equipment.

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 11

Logistics Costs = “Landed Cost”

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 12

• What is landed cost?

• Refers to all expenses involved in getting a
product from the retailer to the customer.
• This includes suppliers, warehousing, taxes,
insurance, and more

• To calculate landed cost, add together your:

• manufacturing cost + shipping cost + shipping insurance +
import duties + other fees

• Manufacturing Cost:
• These costs include the payments you make to suppliers for raw materials or goods, as well
as the production and manufacturing expenses involved in creating finished products.

• Shipping costs
• Shipping fees focus on the costs of getting the product from the production facility to the
location they’ll be shipped from.
• Shipping costs vary depending on factors like location, weight, and package sizes.
• You might also need to pay extra for services like special handling and expedited delivery.
 13

• Customs & import duties

• Customs and import duties increase your expenses significantly, which is why landed costs are more
commonly associated with international shipping.
• You can decide whether to eat the duty costs yourself or to offload them to the customer via pricier
products. However, increasing retail prices may reduce sales.

• Insurance costs
• Shipping insurance is an optional service that you can opt for.
• Many major carriers offer some level of shipping insurance by default, but for more expensive
packages, you’ll need to pay additional fees.

• Handling & payment processing fees

• Handling fees are paid to fulfillment teams for picking and packing your items for shipping, and
payment processing fees apply to each transaction at your store.

• Warehousing costs
• Warehousing costs include storage, administrative, handling, and operational expenses. If you’re
using multiple warehouses or special facilities (e.g. temperature-controlled environments), these
costs add up further.
 14

• An example of calculating landed cost

• Let's take an example of T-shirt fulfillment to calculate landed cost.
• For this, let’s assume the following:
• You're shipping 100 T-shirts.
• The cost to manufacture a T-shirt (which includes sourcing raw materials from
the supplier and production costs) is $4/unit.
• The cost to ship the T-shirts is a flat rate of $150.
• You stored the T-shirts in a warehouse for 3 weeks prior, amounting to $50 in
warehousing costs.
• The shipping insurance is included (so $0 cost here).
• The import duty rate is 10%.
• Now, let’s plug the numbers into the formula:
• $400 (cost of manufacturing the T-shirts) + $150 + {400*0.1} (import duty) + $50
(warehousing costs) = $640

• On a per unit basis the Landed Cost per T-shirt is $6.40 ($640/100 units)
 15

Second Perspective: Economic Utility

• The economic impacts of logistics can affect individual consumers.

 These impacts can be illustrated through the concept of economic utility
o is the value or usefulness of a product in fulfilling customer needs or wants.
• The four general types of economic utility are:
 Possession,
 Form,
 Time,
 Place;
• Logistics:
 contributes to time and place utilities.

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 16

Possession utility

• Refers to the value or usefulness that comes from a customer being

able to take possession of a product.
• Examples:
 Credit and debit cards; facilitate possession utility by allowing the
customer to purchase products without having to produce cash or a
cash equivalent.
 Automotive leases allow customers to take possession of a more
desirable model than would be possible with conventional
automotive loans.
 An expensive piece of furniture might be made more easily
available through a low interest financing deal.
 Checks

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 17

Form utility

• Refers to a product’s being in a form that:

 (1) can be used by the customer and
 (2) is of value to the customer.
• Generally the term been associated with production and
manufacturing
 However, logistics can also contribute to form utility,
through allocation.
o For example: logistics can break the thousands of
cases of diet cola into the smaller quantities that are
desired by customers.

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 18

Place utility

• Refers to having products available where they

are needed by customers
• Products are moved from points of lesser value to
points of greater value.
• Continuing with the diet cola example,
 place utility is increased by moving the soda
from a point of lesser value (e.g., stored in a
warehouse) to a point of greater value (e.g., on a
supermarket shelf).

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 19

Time utility

• Closely related to place utility

• Refers to having products available when they are
needed by customers.
• It is important to recognize that different products
have different sensitivities to time;
 three-day late delivery of perishable items versus
nonperishable items.

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 20

Global Spotlight: Better Logistics Improves Living Standards

• The costs of poor logistics are huge. They extend beyond wasted resources and unsatisfied customers. Poor logistics infrastructure
can lead to malnutrition and starvation—even within a country that has enough food to feed everyone. The problem is getting the
food to the people.

• India is an ongoing and tragic case in point. Although roads are being built and the situation is improving, problems persist. Take
the case of Lahu Bhiwa, a typical rural rice farmer in India. Prior to 2010, his only market was his local village. In 2010, as part of
a huge infrastructure project, a road was paved from his village to a larger town about 20 kilometers away. Travel time shrunk from
a three-hour walk to a 30-minute car drive.

• Able to sell more, the Bhiwa family invested to improve farming productivity. With more crops to sell in a larger market, income
increased 300%. The Bhiwa family’s life, “…has completely changed for the better,” since the roads were built. This family was
one of the many who benefitted from over 600,000 kilometers of roads built by the Indian government during the past 10 years.
Poverty has dropped by one third. About one-fifth of India’s 250 million people, however, still don’t get enough to eat every day.3

• Better logistics are improving living standards around the world. For example, in China, logistics investments have improved
competitiveness, driven economic growth, and created jobs. Over 800 million people have escaped poverty since 1981. China's
ambitious Belt and Road initiative is designed to help land-locked portions of China gain access to markets in Eastern Asia and
Europe and to raise livings standards in countries on the old Silk Road. The ultimate goal: Increase China's influence from the
Pacific to Europe.

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 21

• Achieving possession, form, place, and time utility goes a long way
toward facilitating—but not guaranteeing—customer satisfaction.
 Consider the experience of a former student who placed an online
order of Valentine’s Day flowers for his out-of-state girlfriend.
o The seller facilitated possession utility by allowing the student
to pay by credit card, and
o a healthy arrangement of the correct bouquet (form utility)
o arrived at the girlfriend’s residence on Valentine’s Day (place
and time utility).
 Although the seller provided possession, form, place, and timely
utility,
o the buyer was quite unsatisfied with his purchase.
 The problem: The greeting card that accompanied the
flowers had the wrong name for the girlfriend (but the right
name for the boyfriend)!

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 What is Logistics ?
Logistics: the science and practical management of
the supply of materials

Logistics is also defined as:

“that part of the supply chain

process that plans, implements and
controls the efficient and effective
forward and reverse flows and
storage, services and related
information from the point-of-origin
to the point-of-consumption in order
to meet customer requirements“
ITC M10:U1:1.1-2
 23

• This definition of logistics emphasizes the role logistics plays

within the broader supply chain process.
• Let's break it down:
• "That part of the supply chain process":
• Logistics is a subset of the overall supply chain.
• The supply chain encompasses all the steps involved in
producing and delivering a product or service to the
customer.
• Logistics focuses specifically on the movement and
storage aspects within this chain.
• "Plans, implements, and controls":
• Logistics involves careful planning (deciding the best
way to move and store goods), implementation (putting
those plans into action), and control (monitoring and
adjusting processes to ensure they are efficient and
effective).
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• "Efficient and effective forward and reverse flows and storage":

• Forward flows:
• This refers to the traditional movement of goods, services, and information from
the point of origin (such as a manufacturer) to the point of consumption (such as a
customer).
• Reverse flows:
• This includes the movement of goods or materials in the opposite direction,
such as returns, recycling, or refurbishing.
• Reverse logistics is an important aspect, especially in industries like retail,
where returned products need to be managed effectively.
• Storage:
• Ensuring that goods and materials are stored in a way that maintains their
quality and allows for efficient access.
• "Services and related information":
• Logistics also involves managing the flow of services (like customer service) and
related information (such as tracking details, inventory levels, and order statuses).
• "From the point-of-origin to the point-of-consumption":
• This covers the entire journey of the product from where it is made to where it is
consumed.
• "In order to meet customer requirements":
• The ultimate goal is to ensure that the end customers receive their products or services
in a way that meets their expectations in terms of timing, quality, and quantity.
• In general terms, logistics describes the entire process of materials
and products moving into, through, and out of a firm.
• Logistics describes all of the activities in this regard involved in
securing:
 The right type(s) of material(s)
 In the right quantity(s)
 In the right condition
 To the right location(s) and customer
 At the right time(s)
 For the right cost
 two additional “rights” must be added to the above list:
 Delivered with the right tailored services required by the buyer
 e.g. user technical support, maintenance & repair, etc.
 With the right information needed by the customer during & at the end
of the logistics process
 e.g. information needed to track shipments, on inspections & test
results, on compliance with environmental, health, safety and social
requirements (e.g. for traceability), etc.

The buyer and supplier usually define what is “right” at the time of
negotiating the contract of sale or transportation.
• This explanation of logistics builds on the concept of the "seven rights" of logistics, which ensure that
products and materials are managed effectively throughout the supply chain.
• Let's break down each component:
• Core Components of Logistics:
• The "Seven Rights“
• The Right Type(s) of Material(s):
• Ensuring that the materials or products acquired are exactly what is needed for production,
assembly, or sale.
• This involves selecting the correct specifications, quality, and type of materials that meet the
business's or customer's needs.
• In the Right Quantity(s):
• Acquiring the correct amount of materials or products, neither too much (which can lead to
excess inventory and higher costs) nor too little (which can cause shortages and delays).
• In the Right Condition:
• Ensuring that the materials or products are in good condition when they arrive.
• This involves proper handling, packaging, and transportation to prevent damage or
deterioration.
• To the Right Location(s) and Customer:
• Making sure that materials or products are delivered to the correct location, whether it's a
warehouse, production facility, or directly to a customer.
• This ensures efficiency and customer satisfaction.
• At the Right Time(s):
• Timing is crucial in logistics.
• The materials or products must be delivered when needed, avoiding delays that can disrupt
operations or overstocking that can increase costs.
• For the Right Cost:
• Managing logistics costs effectively to ensure that the materials or products are
delivered at a cost that aligns with the company's budget and financial goals.
• Additional Components:
• with the Right Tailored Services Required by the Buyer:
• Logistics also involves providing additional services that the buyer may require,
such as technical support, maintenance, repair, installation, and training.
• These services add value to the product and enhance customer satisfaction.
• With the Right Information Needed by the Customer During & At the End of the
Logistics Process:
• Providing customers with the necessary information throughout the logistics
process is essential.
• This includes shipment tracking details, inspection and test results, and
information on compliance with environmental, health, safety, and social
requirements.
• This information helps customers make informed decisions and ensures
transparency and traceability
• Summary:
• Logistics is not just about moving products from point A to point B; it's about
ensuring that every aspect of the supply chain is optimized to deliver the right
product, in the right condition, at the right time, and at the right cost, while also
providing tailored services and critical information that meets the buyer's needs.
• This comprehensive approach ensures that the entire logistics process adds value to
the customer and aligns with business goals.
• Objectives of Seller and Buyer:
– The supplying or logistics organisation must
make a profit for its operations to be
sustainable in the long term.
– The buyer’s objective is to minimise the
total cost of supply over the long term.
 The Increased Importance of
Logistics
• A Reduction in Economic Regulation
• Changes in Consumer Behavior
• Technological Advances
• The Growing Power of Retailers
• Globalization of Trade

29
 A Reduction in Economic Regulation
• Deregulation in the 1970s and 1980s: Government control over transportation
rates, fares, and market entry/exit was reduced, particularly in the U.S.
– This allowed for greater competition and flexibility in the transportation
industry, which previously lacked price competition.
• Impact on Logistics Managers:
– Prior to deregulation, logistics managers had limited control over
transportation costs, a major component of logistics. They were forced to
accept services at predetermined rates without alternatives.
• Flexibility in Pricing and Service:
– Deregulation gave carriers flexibility in pricing and service offerings,
allowing companies to tailor logistics services based on needs, such as
speed and cost, and adjust prices accordingly.
• Cost Reduction for Large Buyers:
– The increased flexibility enabled large buyers to negotiate better
transportation rates by concentrating freight with fewer carriers, resulting in
significant cost savings.
 Changes in Consumer Behavior
 Customized Customer:
 Consumers now demand highly tailored products and services to match their preferences.
 Mass customization, enabled by technologies like 3D printing, allows companies to meet these unique
needs. Logistics systems must adapt to this shift by offering flexible delivery options (e.g., same-day or
next-day delivery) at varying costs.
 Changing Family Roles:
 With more dual-income families, convenience is prioritized.
 Logistics must accommodate extended store hours, home deliveries, and ready-to-eat/ready-to-cook
foods.
 Retailers must plan for optimal restocking times and efficient home delivery scheduling to meet these
convenience demands.
 Rising Customer Expectations:
 Over time, customers expect quicker and better service.
 Companies like Toyota have redesigned distribution networks to offer same-day delivery of parts to
retain customers.
 Similarly, Amazon has increased customer expectations with same-day or even one-hour delivery
options in some cities.
 Technological Advances
 Technological Impact on Channel Design:
 Advances in technology have allowed businesses to offer direct distribution
channels, bypassing intermediaries (disintermediation).
 This changes logistics by altering the number and location of fixed facilities
like warehouses and distribution centers, as online stores handle smaller, more
diverse orders compared to physical stores.
 Enhanced Order Picking Process:
 Technologies like radio frequency (RF) devices, voice-directed picking, and
robotic picking have replaced traditional paper-based order picking.
 These innovations reduce errors, improve efficiency, and save time, though
they come with higher costs.
 Improved Shipment Tracking:
 Global positioning systems (GPS) now enable real-time tracking of shipments,
including precise location details and environmental conditions like
temperature and humidity.
 This is especially valuable for sensitive industries such as pharmaceuticals and
healthcare.
 Advances in Retailing
• Big-Box Retailers and Logistics:
– Large retailers like Walmart and Carrefour rely heavily on effective
logistics as a core strategy for business success.
– Their logistical innovations often set trends, particularly in areas like
sustainability, where companies like Best Buy aim to reduce carbon
footprints and recycle vast amounts of consumer goods.
• Omnichannel Retailing:
– This approach integrates multiple sales channels (online, in-store, mobile
apps) to offer a seamless customer experience.
– It requires precise inventory management and demand forecasting, as
online purchases deplete store stock, impacting physical store operations.
• Sustainability in Retail Logistics:
– Big-box retailers are increasingly focused on reducing environmental
impacts.
– Goals like Best Buy’s plan to recycle a billion pounds of consumer goods
and reduce its carbon footprint by 20% reflect the growing importance of
sustainability in logistics strategies.
 Globalization of Trade
 Global Trade Growth:
 Since 1990, world trade has grown at an average rate of 5% annually,
despite economic slowdowns.
 Factors like rising living standards and trade alliances have supported this
growth, with logistics playing a key role.
 Shipping Containers:
 A critical driver of global trade, shipping containers allow for the secure
and efficient transportation of goods over long distances, especially via
cost-effective water transportation compared to air transportation.
 Challenges of International Logistics:
 Global trade introduces more complexity and higher costs than domestic
logistics, with factors such as longer geographic distances, cultural
differences, and costly documentation requirements impacting logistics
processes.
 THE SYSTEMS AND TOTAL COST APPROACHES TO
LOGISTICS

• Systems Approach in Logistics:

– Logistics is a prime example of the systems approach in business, where different functional
areas (e.g., marketing, production, finance, logistics) are interdependent.
– Decisions made in one area should take into account the impact on others to align with the
company’s overall goals.
– A logistics system varies depending on whether a company prioritizes customer satisfaction
or cost minimization.
• Functional Interdependence:
– Changes in one function, such as an increase in Stock Keeping Units (SKUs) to satisfy
customer demand, can create logistical challenges like misidentification, increased storage
needs, and tracking issues.
• An example is misassigning product codes, leading to incorrect deliveries.
• Intra-functional Logistics Coordination:
– The logistics manager must ensure a balance across different logistics activities (e.g.,
materials management and physical distribution).
– Failure to coordinate these can lead to inefficiencies, such as the case where two logistics
groups (inbound and outbound) failed to communicate, even though they used the same
trucking company.
• Total Cost Approach in Logistics:
– This approach requires that all relevant logistics activities (e.g.,
transportation, storage, inventory) are considered as a whole rather than
individually.
– Understanding cost trade-offs is key, as changes in one area (e.g., reducing
transportation costs) can increase costs in another area (e.g., warehousing).
• Cost Trade-offs and Decision-Making:
– The total cost approach examines whether reducing costs in one area (e.g.,
inventory) outweighs the increased cost in another (e.g., expedited
transportation).
• For example, using air freight raises transportation costs but lowers
inventory and warehousing costs, which could result in lower total
logistics costs.
• Total Logistics Concept:
– The total logistics concept integrates all logistics activities into a unified
system aimed at minimizing distribution costs while supporting the
company’s strategic goals.
– It focuses on cost-efficient operations that do not compromise overall
company objectives.
The cost of logistics

• In the past,
– one reason that an integrated approach to logistics and distribution
management has proved difficult was the lack of accurate cost information.
• Conventional accounting systems did not allow the detailed analysis necessary
to identify true costs of serving customers with particular products and
transportation.
• Without the ability to analyse aggregated cost data,
– it was difficult to identify opportunities for greater cost-efficiency within an
existing logistics system.
• Transportation, insurance, customs, handling, storage, packaging and
distribution costs make up a significant proportion of the total product cost.
• Together with labour and materials costs, logistics is usually
– the third largest contributor to the total delivered cost of an item.
• For example, in a typical manufacturing business, logistics often
accounts for about 20% – and can rise to 30% – of the total purchase
cost of an item.
• The efficiency of logistics operations has both a direct and an indirect effect on
the total product unit cost and on an organisation’s operating profit.
– Some logistics costs may be obvious and include the cost of transportation,
insurance, inspection, handling and shipping agents’ fees.
– Other costs are less evident, and are therefore often neglected.
• For instance, whenever a product rests immobile in storage, the
organisation’s cash-flow cycle is lengthened without any recoverable
value being added to the product.
• Money or capital tied-up in idle stock cannot be used for
other purposes.
– The cost of this capital is
• the value of the stock held (unit purchase price +
apportioned logistics costs to the storage stage + the
costs of deterioration and write-offs) multiplied by
the percentage interest rate that the organisation pays
on short-term loans for working capital.
– working capital refers to funds that are tied up
when inventory sitting on a shelf in the
warehouse isn't moving.
 Components of Total Product Cost
(often 20-30 % of total purchase costs)

X
5
Unit Purchase Price 2

+ Logistics costs (transportation, storage

and handling)

+ Deterioration and write-offs

+ Cost of capital (% interest x value) from

supply invoice payment until sales cash receipt

= Total unit costs

ITC M10:U1:1.1-7
• There are also opportunity costs to be added to the
Components of Total Product Cost,
– i.e. the results of business profit lost and customer
dissatisfaction because the product is immobilized rather
than being used or sold opportunely.
– Shortening transportation and storage times and
optimising load sizes increases the profitability of an
organisation through
• lower capital costs, faster cash flow, less damage and
obsolescence, reduced warehouse space requirements
and lower handling costs.
 Logistics and the Supply Chain

• Topics:
a) Cross-functional integration
b) Managing Supply Chain Activities
a) Cross-Functional Integration
Logistics activities need to be carried out in close
co-ordination with the other functions within the
organisation including purchasing, inventory
management, manufacturing, and sales operations!

Organisations also need to be closely integrated with

external bodies such as shipping & freight agencies,
independent warehousing, cross-docking centre operators,
customs, transport regulatory authorities & suppliers,
end users & customers
 Logistical Relationships within the Firm

• LOGISTICAL RELATIONSHIPS with

 Finance
 Production
 Marketing

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 45

Finance
• The finance staff is often charged with the responsibility of allocating the firm’s
funds to projects desired by the various operating departments.
 Instrumental in approving capital budgeting decisions that affect logistics,
such as the acquisition of materials handling equipment (e.g., forklifts) and
packaging equipment (e.g., a shrink-wrap machine).

• Inventory is another area where finance and logistics can interact.

 in times of inflation,
o identical items added to inventory at different times means that each
unit has a different cost, and even though inventory levels are not
affected,
 it makes a difference whether an organization uses historic cost
or current value as an indicator of the inventory’s total value.
o Inflation is a decrease in the purchasing power of money, reflected in
a general increase in the prices of goods and services in an economy.
 for example: In 1980,a movie ticket cost on average $2.89. By
2019, the average price of a movie ticket had risen to $9.16.
 certain items of inventory lose value over time, and others increase value
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 46

Production
• interfaces between production and logistics involves the length of production
runs.
 the production people favor long production runs of individual products.
o A long production run is when many units can be made once the
production line is set up.
 In short production runs, relatively few items can be made for one
set-up.
• Set-ups cost money and the longer the production run the
more efficient and the cheaper per unit because set-up costs
are spread over many items.
 Consequences of Long production run:
• generate large amounts of inventory, and it is often the
logistician’s responsibility to store and track the inventory.
• Excess inventory for particular products occurs because of
limited (or no) demand for them resulting in higher carrying
costs.
• also take up space that could be used to store other
products.
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 47

• Increasing utilization of the postponement concept

 Defined as: the delay of value-added activities such as assembly,
production, and packaging until the latest possible time,
o Moved to warehouse activities, thus increasing logistics costs
case packing, case labeling were traditionally performed at
a production plant are now performed in warehousing
facilities.
As a result, warehousing facilities are adding new types of
equipment and being configured differently to allow
specific value-added activities to take place.

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Marketing
• Contemporary marketing places
 a heavy emphasis on customer satisfaction, and logistics strategies can
facilitate customer satisfaction by reducing the cost of products,
o which can translate into lower prices as well as bringing a broader
variety of choices closer to where the customer wishes to buy or use
the product.
 Logistics strategies offer a unique way for a company to differentiate itself
among competitors
o logistics now offers an important route for many firms to create
marketing superiority.

• Interactions between logistics and marketing focuses on the marketing mix,

sometimes referred to as the four Ps of marketing:
o Place decisions
o Price decisions
o Product decisions
o Promotion decisions

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 49

Place Decisions

• Decisions regarding place involve two types of networks, namely:

 Logistics channel:
o Defined as: the network of supply chain participants engaged in
storage, handling, transfer, transportation and communications
functions that contribute to the efficient flow of goods.
o Logistics decisions concern the most effective way to move and store
the product from where it is produced to where it is sold.
 If a manufacturer is not consistently 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.
 Marketing channel:
o Defined as: the people, organizations and activities that make goods
and services available for use by consumers.
o It transfers the ownership of goods from the point of production to the
point of consumption.

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 50
• From a marketing perspective
 place decisions may also involve new strategies for reaching customers
such as co-branding
o refers to an alliance that allows customers to purchase products from
two or more name-brand retailers at one store location.
o offers potential customers convenience by allowing for one-stop
shopping as well the opportunity to purchase brand-name, rather than
private-label (proprietary), products.
 Private label brands (or own brand labels) are products sold by a
retailer with its own packing, but manufactured by a third party.
• For example, Tesco sell ordinary branded items, such as
Heinz baked beans, but also sell their own 'Tesco Value'
baked beans.

• From a logistical perspective,

 one decision involves product delivery to the particular retail locations.
o Should, for example, each co-branding party deliver its respective
products to a particular location, or
o should the co-branding parties co-load vehicles to minimize the
number of deliveries that arrive at a particular location?
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 51

Price Decisions
• A key price-related decision for marketers involves
 how a product’s transportation costs should be reflected in its selling price
o this has proved to be a particularly disturbing issue for some online merchants.
 should a company’s selling price reflect its product’s landed cost
• refers to the price of a product at the source plus transportation
costs to its destination?
• On the one hand, a selling price that is based on a product’s landed
cost allows the seller to offer “free” delivery of the product to
prospective customers, because the transportation costs associated
with delivery are captured in the landed cost.
• On the other hand, a selling price that is based on a product’s
landed cost could result in a substantial increase in a product’s
selling price, and a higher selling price tends to decrease buyer
demand for most products.
• One way that some online merchants address this problem is to
require a minimum order amount (e.g., $50) to qualify for
• “free” delivery.
 The logistics manager can also help formulate the firm’s quantity discount pricing
policies (Large amounts decreases transportation unit costs).

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 52

Product Decisions
• Product offerings (variety):
 which allows for more customer choice
o creates logistical challenges in terms of identification, storage, and tracking.

• Amount of particular SKUs to hold.

 Marketers often prefer to carry higher quantities of particular items because this
reduces the likelihood of stockouts (being out of an item at the same time there is
demand for it).
o However, from a logistics perspective, higher quantities of inventory
 (1) necessitate additional storage space
 (2) increase inventory carrying costs.

• Product design:
 which is often the purview of marketers, can also have important implications for
logistical effectiveness and efficiency (space; warehouse, containers, pallets,
forklifts…).
o Design for Logistics concept
 Design for logistics is the design of products for manufacturing,
packaging, shipping, warehousing, merchandising and repackaging for
returns.

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 53

• Marketers’ growing emphasis on offering sustainable products

 Defined: products that meet present needs without compromising the ability
of future generations to meet their needs
o can also impact logistical decisions
 for example, fair trade products,
• those that guarantee a better deal for producers in the
developing world through fair and stable prices as well as
teaching farming methods that are environmentally
sustainable.
• From a marketing perspective
• customer demand for fair trade products, such as coffee
or chocolate, has resulted in some companies
establishing distinct fair trade brands.
• From a logistical perspective,
• an organization’s commitment to selling fair trade
products, such as coffee or chocolate, may result in
changed sourcing requirements for the necessary
raw materials.

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 54

Promotion Decisions

• Require close coordination between marketing and logistics.

 Few things are more damaging to a firm’s goodwill than being
stocked out of items that are heavily promoted in a sales campaign.
 Imbalances of product supply and demand can be viewed as “bait-
and-switch tactics”.
• the logistics staff assumes responsibility for having the product in place
on the scheduled release date—not earlier, not later

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 55

MARKETING CHANNELS

• Marketing Channels:
 Marketing channels refer to the institutions involved in transferring goods from
production to consumption, involving activities across the ownership, negotiation,
financing, promotions, and logistics channels.
 Key players include manufacturers, wholesalers, and retailers.
 Ownership Channel:
 This involves the transfer of title to goods, even when the physical product may
not yet exist.
 The owner bears the costs and risks and can use the product as collateral for loans.
 Ownership transfers may happen before goods are produced in high-demand
scenarios, like commissioned artwork or commercial airplanes.

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• Negotiation Channel:
– Agreements on buying and selling are reached here, which can occur via
different mediums (face-to-face, email, phone).
– Not all transactions involve active negotiation; some may be based on fixed
prices.
– Negotiation can also cover delivery, payment terms, and even packaging
specifications, such as Ford’s reuse of supplier crates for vehicle
floorboards.
 Financing Channel:
 This channel handles payments and credit across participants, with various players often
extending or receiving credit to keep the channel alive.
 Wholesalers might place products on consignment or advance cash to manufacturers.
 In challenging times, like after the 2007–2009 recession, larger companies may delay payments,
affecting smaller suppliers negatively.

 Promotions Channel:
 This handles the marketing and promotion of products, which often ties into financing through
monetary allowances.
 It also connects to logistics, as advertising materials, special labeling, and promotional displays
need to be distributed and placed alongside the promoted products.
 Logistics Channel and Sorting Function:
The logistics channel focuses on moving goods efficiently.
A key element is the sorting function, which involves:
o Sorting out: Categorizing a diverse supply of products
into homogeneous stocks.
o Accumulating: Gathering similar stocks from different
sources.
o Allocating: Dividing a large supply into smaller lots.
o Assorting: Creating assortments of goods for resale,
often handled by wholesalers or retailers.
 Intermediaries in Channels:
Intermediaries (facilitators) play essential but often overlooked roles in the channels.
 These may include banks, brokers, and freight forwarders, who do not usually take ownership of goods but
help streamline operations and communication between major parties.
 Ownership Channel Intermediaries:
 Banks or finance companies may assume temporary ownership of goods as part of loan agreements,
ensuring goods are produced, marketed, and sold by providing the necessary credit.
 Negotiation Channel Intermediaries:
 Brokers arrange transactions, often facilitating services like truck transportation for shippers and
truckers, adding value by saving time and providing expertise in finding transportation options.
 Financing Channel Intermediaries:
 Banks and finance companies are crucial here, especially for large purchases like ships or
warehouses. They supply the credit required, and insurance companies may also be involved to fulfill
contractual requirements.
 Promotions Channel Intermediaries:
 These include firms that design and transport trade show exhibits, advertising agencies, and public
relations firms.
 Some companies may even outsource their sales efforts to contract sales forces, coordinating
promotional activities with broader marketing communication strategies.
• Logistics Channel Intermediaries:
– Freight forwarders assemble small shipments into larger ones for efficient transport.
– In international logistics, specialized intermediaries abound, such as cargo surveyors for specific
goods like coffee, who handle damage claims and quality assessments.
Activities in the Logistical Channel
• Customer service • Demand forecasting
• Facility location • International logistics
decisions • Materials handling
• Inventory • Packaging
management • Reverse logistics
• Order management • Warehousing
• Procurement management
• Transportation
management

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• 1. Logistics Customer Service
 Definition: Ensures the delivery of goods or services in a way that satisfies customer expectations.
 Key Points: Involves tracking orders, timely delivery, handling returns and resolving customer
inquiries. It is vital for customer retention and overall satisfaction.
• 2. Facility Location Decisions
 Definition: The process of determining the most optimal locations for production, storage, and
distribution facilities.
 Key Points: Decisions are based on proximity to suppliers, customers, transportation routes, and cost
efficiency. It affects operational costs and service levels.
• 3. Inventory Management
 Definition: The process of managing and controlling stock levels to ensure that the right amount of
product is available at the right time.
 Key Points: Balances between holding too much inventory (high costs) and too little (stockouts). It
involves techniques like just-in-time (JIT) or safety stock.
• 4. Order Management
 Definition: The process of receiving, tracking, and fulfilling customer orders.
 Key Points: Involves managing order entries, picking, packing, shipping, and invoicing. Efficient
order management ensures customer satisfaction and reduces errors.
• 5. Procurement
 Definition: The process of sourcing and purchasing goods and services
needed for operations.
 Key Points: Involves supplier selection, contract negotiation, and cost
management to ensure timely and cost-effective acquisition of materials.
• 6. Transportation Management
 Definition: Managing the movement of goods from one location to another.
 Key Points: Involves selecting the right carriers, optimizing routes, and
managing freight costs while ensuring on-time delivery.
• 7. Demand Forecasting
 Definition: Predicting future customer demand to align production,
inventory, and distribution processes.
 Key Points: Uses historical data, market analysis, and statistical tools to
estimate future demand and avoid overstock or stockouts.
• 8. International Logistics
 Definition: Managing the transportation, storage, and flow of goods across
international borders.
 Key Points: Involves handling customs regulations, import/export
documentation, tariffs, and currency exchange while ensuring goods
comply with global regulations.
• 9. Materials Handling
 Definition: The movement, protection, storage, and control of materials
throughout the supply chain.
 Key Points: Ensures safe and efficient handling of goods using equipment
like forklifts, conveyors, and automated systems. It reduces damage and
improves efficiency.
• 10. Packaging
 Definition: The process of preparing products for transport, storage, and sale.
 Key Points: Protects products, reduces damage, and facilitates handling and
transportation. Packaging is also important for branding and environmental concerns.
• 11. Reverse Logistics
 Definition: The process of managing the return of products from customers back to
the company.
 Key Points: Includes activities like product returns, recycling, refurbishing, and
disposal. Reverse logistics helps recover value and reduce waste.
• 12. Warehousing Management
 Definition: Managing the storage, handling, and flow of goods within a warehouse.
 Key Points: Ensures efficient use of space, accurate inventory control, and timely
movement of goods through processes like receiving, storing, picking, and shipping.
 Logistics Careers
• As a logistics undergraduate student, you can explore a wide range of career opportunities in
logistics and supply chain management. Here are some possible career paths:
– Logistics Coordinator
 Role: Overseeing the day-to-day operations of product shipments.
 Responsibilities: Coordinating with transportation, ensuring timely delivery, and
managing inventory levels.
– Supply Chain Analyst
 Role: Analyzing data and logistics processes to improve efficiency.
 Responsibilities: Gathering data on supply chain processes, identifying trends,
and suggesting improvements to reduce costs and streamline operations.
– Transportation Manager
 Role: Managing the transportation of goods.
 Responsibilities: Overseeing vehicle fleets, negotiating with carriers, and
optimizing transportation routes.

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• Inventory Manager
 Role: Managing stock levels and ensuring that inventory is available when needed.
 Responsibilities: Monitoring stock, placing orders, and ensuring minimal overstock or shortages.
– Warehouse Manager
 Role: Supervising warehouse operations, including receiving, storing, and shipping products.
 Responsibilities: Managing staff, maintaining equipment, and ensuring efficient warehouse
workflows.
– Procurement Manager
 Role: Overseeing the acquisition of materials and products.
 Responsibilities: Negotiating with suppliers, managing vendor relationships, and ensuring that
materials are procured cost-effectively and on time.
– Freight Forwarder
 Role: Coordinating international shipments and ensuring compliance with customs regulations.
 Responsibilities: Handling documentation, arranging cargo insurance, and managing the logistics
of international trade.
– Operations Manager
 Role: Overseeing all aspects of logistics and supply chain operations.
 Responsibilities: Ensuring smooth operations across procurement, transportation, and
warehousing, while aligning with the company's strategic goals.
Copyright © 2015 Pearson Education, Inc. 66
• Customs Broker
 Role: Ensuring that shipments meet all regulations for import and export.
 Responsibilities: Managing paperwork, ensuring compliance with laws, and clearing
shipments through customs.
– Demand Planner
 Role: Predicting future product demand and helping plan supply chain activities
accordingly.
 Responsibilities: Analyzing sales data, forecasting demand, and working with other
departments to ensure inventory availability.
– E-commerce Logistics Manager
 Role: Managing logistics for online sales.
 Responsibilities: Overseeing order fulfillment, returns management, and coordinating
last-mile delivery.
– Reverse Logistics Manager
 Role: Managing the process of returning goods from customers.
 Responsibilities: Coordinating the return of products, managing refurbishing or
recycling processes, and ensuring cost-effective reverse logistics operations.

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• Logistics Consultant
 Role: Advising companies on optimizing their logistics and supply chain processes.
 Responsibilities: Assessing company operations, identifying areas for improvement, and
recommending solutions for better logistics management.
– Fleet Manager
 Role: Managing a fleet of vehicles used in transporting goods.
 Responsibilities: Maintaining vehicles, managing drivers, optimizing routes, and
ensuring compliance with regulations.
– Export Coordinator
 Role: Handling the logistics and documentation for exporting goods.
 Responsibilities: Managing export licenses, customs documentation, and coordinating
with international logistics providers.
– Logistics Engineer
 Role: Applying engineering principles to logistics and supply chain operations.
 Responsibilities: Designing systems for transportation, storage, and distribution, and
developing technology solutions for logistics challenges.

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 Logistics Professionalism
Professional Organizations Dedicated to Advancing the
Professional Knowledge of their members:
• APICS – The Association for Operations Management ([Link])
• American Society of Transportation and Logistics (AST&L) ([Link])
• Council of Supply Chain Management Professionals ([Link])
• Delta Nu Alpha (DNA) ([Link])
• International Society of Logistics (SOLE) ([Link])
• Supply Chain & Logistics Association Canada (SCL) ([Link])
• The Chartered Institute of Logistics and Transport in the UK – CILT (UK)
([Link])
• Warehousing Education and Research Council (WERC) ([Link])

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 Logistics management involves the strategy &
operations relating to the movement of goods
within the enterprise & with its immediate
suppliers & customers.

Supply chain management involves managing the

relationships amongs all members in the supply
chain.

A company‘s Logistics strategy needs to be

closely aligned with the supply chain‘s overall
strategy.
ITC M10:U1:1.2-3
• The key difference between supply chain management and
logistics management is that;
– logistics management
• is a planning system and structure that tries to
develop a single plan for the flow of products and
information through a business.
– Supply chain management enhances this idea and
• tries to create coordination amongst the processes of
all supply chain members, both downstream towards
the end customers and upstream towards the
suppliers of raw materials.
Supply Chain & Logistics Management
A Practical Viewpoint

Supply Chain
Logistics Management

72