Logistics Management

Abstract

This article examines the subject of Logistics Management. Topics covered include working definitions of the terms logistics management and supply chain management, and an outline of the various activities involved in the logistics management process. Also, we highlight the key supply chain management processes and the relationship each plays in conjunction with logistics management. A practical example of logistics management in action is provided, along with the various logistic management activities and terms of art.

Supply Chain Management

Supply chain management is not a new concept—nor is logistics management. The actual practice of logistics management has its first recorded origins in annals of military history from the times of the ancient Romans and Greeks, whereby armies employed basic logistics principles to make sure that their respective armies were adequately equipped with needed supplies for waging warfare. Commercial businesses, driven by the process of transforming raw materials in the manufacturing process, have always engaged in supply chain management on some level. However, the phrase supply chain management was first coined by the consulting firm Booz Allen Hamilton back in 1982.

Oftentimes, logistics management and supply-chain management are used interchangeably by supply chain management professionals. Yet, they are entirely separate concepts. The distinction lies in the fact that logistics management is a subset of activities within the broader supply chain management process. Thus, no meaningful discussion of logistics management can take place without a solid footing in supply chain management. The Council of Supply Chain Management Professionals (CSCMP) recognizes this distinction of logistics management as a component of supply-chain management.

Definitions of Supply Chain Management

The CSCMP defines supply chain management as:

"Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies" (CSMP, n.d.).

Similarly, yet in more plain language, the National Alcohol Beverage Control Association (NABCA) defines supply chain management as:

"Supply chain management is a set of approaches used to efficiently integrate suppliers, manufacturers, warehouses, and customers so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time in order to minimize system wide costs while satisfying service-level requirements" (NABCA, 2004).

Therefore, a typical supply chain consists of an integrated, coordinated network of suppliers, manufacturers, warehouses, distributors, and retailers, through which parts, raw materials, and subassemblies are acquired, transformed, and delivered to the ultimate customer (see Figure 1). Simply stated, supply chain management (also known as SCM) includes the following supply chain functions of: planning, buying decisions, making products, storing products, moving products, selling products, and handling of returns from customers. By its very nature, supply chain management requires effective collaboration, i.e., real-time, accurate communication and information exchange among the various supply chain partners, as well as the functional areas in a company, such as marketing, finance, and operations.

Note that an AMR Research study of supply chain organizations identified the following goals related to supply chain management (Hillman, 2006):

• Manage and reduce materials costs;
• Optimize overall internal supply chain costs;
• Reduce supply chain risk;
• Improve manufacturing efficiency;
• Enhance customer service;
• Understand customer/end-user demand.

Cleary, firms gain a competitive advantage when they are able to achieve these stated goals. The benefits of effective supply chain management can range from higher productivity, lower supply costs, greater customer loyalty, lower inventory carry costs while increasing inventory turnover, decreasing transportation costs, and order fulfillment costs—to name a few. Combined together, these improvements normally translate into increasing company profits and increased market share—certainly a desirable state of affairs for any company.

Core Business Processes

Aside from understanding the goals related to supply chain management, a fundamental grasp of supply chain management requires an essential understanding of the core business processes involved in supply chain management. The Global Supply Chain Forum of the Ohio State University identifies eight key supply chain management processes and the relationship each plays with respect to the logistics management function (Lambert, 2004):

1. Customer relationship management—key customers and customer groups are identified. The logistics function interfaces with customer relationship management in that logistics capabilities are determined in light of the firm's identified customers.
2. Customer service management is the administration and coordination of key suppliers and customers. The role of logistics management is to outline key performance specifications for suppliers in alignment with customer requirements and expectations.
3. Demand management balances customer requirements with supply chain capabilities, matching supply and demand with minimal disruptions. Logistics' role is to produce reliable and accurate forecasts for the demand management process.
4. Order fulfillment entails those activities for defining customer requirements and designing an order fulfillment network, which enable firms to meet customer requests. Network planning is provided by logistics management in designing and operating the information systems necessary for accurate and cost-effective order fulfillment.
5. Manufacturing flow management includes all activities necessary to provide the timely and efficient ability to manage a variety of products in the supply chain and to move products through a company's plants. Prioritization criteria are developed by logistics in moving products through the manufacturing plant.
6. Supplier relationship management identifies key suppliers based on the capabilities of these suppliers and the needs of the firm. In turn, the logistics management function manages the inbound flow of parts, supplies, and raw materials needed in the production process.
7. Product development and commercialization provides the structure for working with customers and suppliers to develop products and market them to potential customers. Working closely with marketing and operations, logistics management establishes movement requirements that enable the delivery of products to the final consumer.
8. Returns management is the process dealing with product returns, namely through returns-management and return-avoidance (i.e., getting it right the first time). In logistics management parlance, this is known as reverse logistics—to be discussed later.

Logistics Management & Supply Chain Management

As our definition states, supply chain management also encompasses logistics management, which is mainly concerned with transportation, inventory management, and distribution, comprised of a flow of goods and information. In particular, logistics management concerns all levels of the supply chain, which includes supplying raw materials, parts, subassemblies, and finished goods—which have inventory that must be managed, transported, and distributed. Vast arrays of firms employ logistics management, such as: government and military organizations, manufacturers, transportation firms, retailers, warehousing companies, merchandising firms, and wholesale distributors. The enormity and importance of logistics management is apparent based on figures obtained from CSCMP's annual "State of Logistics Report." The 2015 report indicates that logistics expenditures in the United States totaled more than $1.45 trillion U.S. dollars in 2014. Comparatively speaking, this expenditure equals 8.3 percent of nominal U.S. GDP (gross domestic product) for year 2014—a massive expense (Schulz, 2015).

Logistics Management

The Council of Supply Chain Management Professionals (CSCMP) defines logistics management as:

"Logistics management is that part of supply chain management 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 the point of consumption in order to meet customers' requirements. Logistics may have either internal focus (inbound logistics), or external focus (outbound logistics) covering the flow and storage of materials from point of origin to point of consumption" (CSCMP, n.d., 4).

"Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third-party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution—strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions including marketing, sales manufacturing, finance, and information technology" (Rao, 2009). See figure 2 below.

Notice that within this definition of logistics management, it refers to the forward and reverse flow of goods and information from the point of origin to the point of consumption. This reverse flow is known as reverse logistics (see Figure 3). "Reverse logistics is the process of moving returned goods from their consumer destination for the purpose of capturing value or proper disposal. It includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory, as well as packaging and shipping materials from the end user or reseller" (Blanchard, 2007). Reverse logistics costs are sizable—estimated to be approximately a half percent of the total US GDP—accounting for approximately $ 58.34 Billion in expense for year 2004 in the U.S. (Rogers, Lambert, Croxton & Garcia-Dastugue, 2002).

Essentially, logistics management is the management of the movement of goods and information, i.e., all of the shipping and delivering decisions, getting raw materials, parts or supplies, from vendorto the manufacturer and delivering the finished products from the manufacturer to the distributors, who in turn deliver to retailers for ultimate delivery to consumers. In practical terms, logistics management involves the art and science of getting the right materials, to the right place, in the right quantities, at the right price, with the right quality, at the right time. Due to the fact that effective logistics are so vital to the success of a business, managing these decisions is critical. The bottom line is this: logistics management is an important way for companies to minimize costs and to enhance their overall customer service.

Firms Providing Integrated Logistics Management Solutions

Firms such as Schneider Logistics, DHL Logistics, Exel, UPS Supply Chain, and FedEx Supply Chain Services, are examples of firms that offer integrated logistics management solutions to other companies. They are known as third-party logistics providers (3PL providers). Stated another way, 3PL provider refers to the outsourcing of a logistics function(s). On the flip side, you have what are known as fourth-party logistics providers (4PL providers). 4PL providers are organizations that select and manage 3PL providers based on what they determine to be the most optimal logistics management solutions for a given firm. In other words, a 4PL organization creates unique logistics management solutions that cannot be achieved by any single 3PL provider.

As mentioned before, the main objectives of a logistics management system are to maximize customer service and to minimize the total cost of its activities. In other words, the goal is to add value to the customer and reduce the cost of adding that value. Unfortunately, not all firms manage logistics management effectively or efficiently. For example, failures may be rooted in poor data quality upon which logistics decisions rely, improper management of the overall logistics management function, or some unexpected natural calamity. These failures cause disruptions along the entire supply chain, e.g., missing raw material and parts, which cause production delays, causing late orders, in turn generating customer dissatisfaction. Realizing that such disruptions ultimately result in a loss of customers, interruptions along the supply chain are something no business can afford in today's competitive global marketplace.

Applications

Let's consider a real-life example of how the logistics management process flows in the overall supply chain. A good illustration is that of Campbell Soup Company—well-known for their variety and quality soups provided to the food industry. When opening a can of soup, few people wonder how a can of soup and its various component parts ended up in their kitchen cabinet. It all starts with the supply chain and the logistics management function (see Figure 4 below).Though our example only shows a single supplier, distributor, and retailer for Campbell Soup Co., a large manufacturer of their size and scope likely has numerous suppliers, distributors, and retailers. Also, in this example, we are viewing the supply chain only from the viewpoint of Campbell Soup. Yet, we can also diagram the supply chain from the perspective of the other companies involved, such as Alcoa, Silgan Holdings, or Kroger, as well, or any other Campbell Soup Co. supplier, distributor, or retailer.

For illustrative purposes, the supply chain process for Campbell Soup Co. begins with Alcoa—a supplier of extracted aluminum necessary in the production of aluminum cans. Alcoa then ships rolls of aluminum to Silgan Holdings, a producer who converts the aluminum into soup cans. Since Alcoa is an indirect supplier to Campbell, Alcoa is known as a tier-2 supplier. Silgan Holdings, a customer of Alcoa and supplier to Campbell Soup, in turn sells their manufactured aluminum cans to Campbell Soup Co., who at this point is a customer of Silgan Holdings. As a supplier to Campbell Soup Co., Silgan Holding is known as a tier-1 supplier in that they directly supply cans to Campbell Soup Co. Campbell Soup then supplies its customer, Bridgetown Foods, (a wholesale food distributor), with cans of soup, who in turn ships and distributes Campbell's Soup to grocery retailers, such as Kroger Company, who then sell Campbell's Soup to the ultimate customer. This is noteworthy in the sense that most of the participants along a supply chain are both suppliers and customers.

Inbound & Outbound Logistics

Through it all, the entire process of moving raw materials, parts, and supplies to the manufacturer, and the process of moving the finished good (i.e., soup) is the designated role carried out by the logistics management function. At this point, a couple of terms need defining: inbound logistics and outbound logistics.

• Inbound logistics involves the materials handling, transportation, receipt, and warehousing of raw materials, parts, and supplies, and their distribution to manufacturing as they are needed in the production process. In the case of Alcoa and Silgan Holdings supplying Campbell Soup Co., this represents inbound logistics.
• Outbound logistics consists of activities involving materials handling, order fulfillment, packaging, transportation, warehousing, and distribution of finished products to the ultimate consumer. When Campbell forwards cans of soup (the finished product) to its distributor (Bridgetown Foods), which then forwards the product to the retailer (Kroger), these transactions are examples of outbound logistics.

As the diagram below (Figure 4) shows, the flow of goods and information travels in a forward and reverse direction along the entire supply chain. For instance, Silgan Holdings places an order with Alcoa for a certain amount of aluminum rolls, resulting in Alcoa shipping the order of aluminum to Silgan—this is a forward flow of goods. Or, Silgan Holdings may return a quantity of aluminum to Alcoa for some reason, such as unacceptable quality, resulting in a reverse flow of goods—i.e., reverse logistics—a concept discussed earlier. Similarly, Campbell Soup Co., after receiving cans from its supplier Silgan Holdings, may likewise return defective aluminum cans to Silgan, again resulting in a reverse flow of goods back through the supply chain.

Logistics Management Activities

The following is a run-down of the various logistic management activities enumerated above in Figure 4. This outline gives a clearer perspective on the various activities inherent in the logistics management function and their interrelationships.

Transportation Management is concerned with determining the most efficient means of executing the movement of product, utilizing various modes of transportation whether it is rail, trucking, shipping, or air transport. The objective is to optimize loads, vehicles, and drivers, with the overall objective of reducing cost and increasing transportation efficiencies.

Logistics Network Design concerns the design of information management systems to aid in the systematic planning, organizing, managing, and control in the areas of order fulfillment, warehouse management, transportation management, materials handling, inventory management, and supply/demand planning. The system integrates with enterprise resource systems in the purchasing of raw materials and parts, manufacturing, marketing and sales functions. Likewise, by necessity, logistics professionals interface with all of an organization's functional areas, i.e., operations, marketing, sales, and finance. Thus, logistics network design facilitates collaboration and integration amongst the various parties in the supply chain relationship.

Logistics Collaboration has been encouraged through an industry-wide initiative known as Collaborative Planning Forecasting and Replenishment (CPFR). CFRR is a Voluntary Inter-Industry Commerce Standards Association (VICS) committee made up of retailers, manufacturers, and solution providers. In this system, partner firms exchange information on product sales and predictions in order to align their operational plans to enable automatic product replenishment and consequently increase the overall efficiency of the supply chain (http://www.vics.org/committees/cpfr/).

Fleet Management involves managing a firm's private and/or contracted fleet for optimal use in transporting goods, involving such issues as fleet availability, condition, fleet location, maintenance, replacements, etc.

Warehouse Management is the management of the movement and storage of materials throughout the warehouse—including receiving, picking, and shipping activities.

Materials Handling concerns the physical handling of goods from the time of procurement to the shipment phase.

Order Fulfillment refers to the activities necessary in responding to customer orders, e.g., receiving and processing orders, delivery, and handling customer inquiries, etc.

Inventory Management involves managing inventory to match supply with demand in the most cost-effective and efficient manner. Decisions include how much inventory to hold, how much to order, and when to order.

Supply/Demand Planning is the planning process of matching sources of supply according to customer demand requirements, as well as supply chain capabilities, over a given time frame.

3PL Management is the process of choosing and managing relationships between the firm and any third-party logistics management providers such as DHL, UPS Logistics, Schneider Logistics, etc.

Conclusion

In light of recurring natural disasters, threats of global terrorism, increasing global competition, and rising fuel costs, the effective administration of the supply chain and the logistics management function are even more of an imperative. The logistics management function plays a critical role in this regard. It also follows that the effective administration of the logistics management function is an important way for firms to create and sustain a competitive advantage by reducing costs, increasing productivity, while improving customer service and increasing profits along with market share. At the opposite side of the spectrum, the end results of poor logistics management are higher costs, a possible loss of customers, lower market share, and not surprisingly, lower profit. Indeed, the threat of poor logistics execution represents an enormous incentive for firms to "get it right the first time." Hence, the call for effective logistics management is made abundantly clear.

Terms & Concepts

CFRR: Collaborative Planning Forecasting and Replenishment.

Fourth-Party Logistics Providers (4PLs): Organizations who manage the 3PL provider relationships of a firm.

Logistics Network Design: The design of information management systems to aid in the seamless integration of the various logistics management activities.

Inbound Logistics: Materials handling, transportation, receipt and warehousing of raw materials, parts, and supplies, and their distribution to manufacturing as they are needed in the production process.

Logistics Management: Management of the movement of goods and information.

Outbound Logistics: Activities involving materials handling, order fulfillment, packaging, transportation, warehousing, and distribution of finished products to the ultimate consumer.

Reverse Logistics: The reverse flow of goods and information along the supply chain due to products returned because of defects, obsolescence, product recalls, etc.

Supply Chain Management: Management of an integrated, coordinated network of suppliers, manufacturers, warehouses, distributors, and retailers, through which parts, raw materials, and subassemblies are acquired, transformed, and delivered to the ultimate customer.

Third-Party Logistics Providers (3PLs): Third-party firms who contract to manage a firm's logistics function.

Tier-1 Supplier: A direct supplier to a firm.

Tier-2 Supplier: A supplier of inputs to a given firm's tier-1 supplier.

Transportation Management: Determining the most efficient and cost-effective way to execute the movement of goods, via various modes of transportation.

Warehouse Management: Also known as warehousing, warehouse management is the management of the movement and storage of materials throughout the warehouse.

3PL Management: The process of choosing and managing relationships between the firm and any third-party logistics management providers.

Bibliography

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Schulz, J. D. (2015). 26th Annual State of Logistics: Freight moves the economy. Logistics Management, 54(7), 24–28. Retrieved Dec. 3, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=108402736&site=ehost-live&scope=site

Suggested Reading

Bai, C., & Sarkis, J. (2012). Supply-chain performance-measurement system management using neighbourhood rough sets. International Journal Of Production Research, 50(9), 2484–2500. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=76312400&site=ehost-live

Fassoula, E. (2005). Reverse logistics as a means of reducing the cost of quality. Total Quality Management & Business Excellence, 16(5), 631–643. Retrieved April 19, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17588624&site=ehost-live

Lynch, D., Keller, S., & Ozment, J. (2000). The effects of logistics capabilities and strategy on firm performance. Journal of Business Logistics, 21(2), 47–67. Retrieved April 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4315158&site=ehost-live

McGinnis, M., & Kohn, J. (2002). Logistics strategy revisited. Journal of Business Logistics, 23(2), 1–17. Retrieved April 22, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=8566921&site=ehost-live

Myerson, P. (2015). Supply chain and logistics management made easy: Methods and applications for planning, operations,integration, control and improvement, and network design. Old Tappan, NJ: Pearson Education.

Stock, G., & Greis, N. (1999). Logistics, strategy and structure. International Journal of Physical Distribution & Logistics Management, 29(3/4), 224. Retrieved April 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2019116&site=ehost-live