Business Logistics & SCM

Get to Know about Logistics and the Industry

Logistics in a Competitive Milieu… March 23, 2007

Filed under: Business Logistics — TSBL @ 12:34 am

Published in Newspaper – THE HINDU – India’s National Newspaper

Article Dated:22/12/2003

Today logistics management in India has become complex with about ten million related outlets to cater to the needs of 1000 million people, says V. Sanjeevi.

LOGISTICS IS one of the oldest and also the newest activitives of business management. It involves combining diverse functions and service providers who may be culturally and objectively different.

Logistics is about moving materials, information and funds from one business to another or from a business to the consumer. It is an important part of the business economic system and is a major global economic activity. In fact 10-15 per cent of product costs is logistics related. Worldwide, logistics constitutes about $2 trillion a year. For any country, the logistics cost is estimated between 9 and 20 per cent of its GDP.

The logistics market in India is estimated to be Rs. 260,000 crores and constitutes 13 per cent of the GDP. It is much higher than for the U.S. but lower when compared to countries like China and Korea.

A reduction in logistics costs by one percentage point will mean a saving of $4.8 billion or Rs. 21,600 crores annually.

Besides significant benefits can be reaped through the multiplier effect of better logistics on all economic sectors.

What is logistics?

Logistics was defined by the Greeks as “the science of correct reasoning by means of mathematics”. The first modern use of the term was in the military to identify the process of planning and co-ordinating the movement of army and weapon support systems. Good logistics brings out the ability to move faster and accurately to the battle front. If one applies the same to the business organisation, it is one’s ability to reach the product to the consumer at the right time, right place , right quantity and at the lowest cost. On similar lines, supply chain management will mean the network of organisations involved in the process by which goods are moved from producer to consumer and the counterflow of information, to manage the supply chain as a single entity.

A prominent application of logistics was in World War II where weapon movements were coordinated to ensure success. A recent instance of massive logistics initiatives is in the Gulf war. With increasing competition in the market place, managements started focusing on customer services in the early 1950s in developed markets such as Europe and the U.S. In late 1960s some of the logistics concepts were tested. Following the oil crisis of the 1970s and the concept of just-in-time in manufacturing customer servicing standards were given more importance and new integrated logistics models and solutions were born. The emergence of organised distribution system by department stores and superfast courier service organisations gave a boost to logistics concepts and strategies. Today all businesses are looking for seamless transaction systems to co-ordinate their information and material requirements along the value chain.

Today logistics management in India has become complex with about ten million related outlets to cater to the needs of 1000 million people.

At the micro level any manufacturing and marketing company spends 5 – 35 per cent of sales on logistics. The major cost components are transportation, warehousing and inventory carrying cost. Improvements in logistics get reflected in a reduction in inventory levels, shorter delivery schedules, improved servicing standards with significant savings in total costs.

At present, companies specialising in logistics operations in India use traditional technologies and cater to stand alone services like transportation, warehousing, clearing and forwarding. There is tremendous scope to upgrade the technology, integrate the entire supply chain, improve productivity levels and bring down operating costs. Any technology that can improve productivity in transportation operations will be a great boon to the economy both directly and indirectly with opportunities for 10-12 per cent reduction in costs. Besides the savings on downstream users of transport will be much higher and the cost multiplier effect on the economy will be reduced to that extent.

Given the emerging business and technological trends there are possibilities for adoption of innovative logistics solutions specifically designed for India. In addition, there is a requirement for an integrated strategy towards developing logistics and its related IT infrastructure and also enhancing its industry base.

In recognition of the growing need for technology enabled solutions in logistics in India and abroad, many companies such as eLogistics are taking shape. In fact, there are a dozen multinational logistics companies such as Exel, Bax Global and Menlo which have started operations in India during the last few years.

Logistics management process

Michael Porter in his famous book “Competitive Advantage” has spoken of the value chain approach and emphasised logistics as one of the most important tools for competitive advantage.

The various processes and elements that are part of logistics as a discipline are

Inbound logistics: Purchasing, Inbound transportation, Inventory Management.

Manufacturing: Production planning systems, Machine scheduling system.

Outbound logistics: Order booking process, Distribution management, Outbound transportation, and Warehouse management systems.

As customers started demanding improved servicing standards, fast cycle time has become the key factor for business success, whether it is custom made tailoring service in Hong Kong or development of a new car in Detroit.

Before delving deep into logistics, a look at the current business scene will be great help.

A few industry applications

Until a decade ago, logistics was a word used only in commercial organisations. Now one hears the word daily. Take the case of conducting elections: What is logistics here? The ability of the Election Commission to arrange for ballot papers, polling booths, collection of votes, counting and other procedures in the shortest possible time.

Take the case of agriculture, in India there are seven layers between the agricultural producer and the consumer, whereas in the U.S. it is only two. Any good agricultural logistics system perhaps needs to have only two or three layers like manufacturing and marketing companies which have two or three layers. More layers means more delays, more wastage of resources, more cost brokers. A good logistics can eliminate all this. Milk distribution is a good example of efficient logistics. Through the logistics tools and technology it is possible to do the same in any other sectors such as foods and vegetables.

The successful cement companies have focused on logistics and supply chain management to ensure higher margins and improve servicing standards.

In fact, the total cost incurred by these companies up to the manufacturing point is only a third of the selling price and the balance consists of logistics, selling commission, receivables and related aspects. One need not reiterate the importance of logistics and supply chain management for industries such as cement.

Improvement studies

The marketing companies have to ensure that their goods are available at the right place, right time to the right client in right quantity and right quality, and at lowest possible cost. What are the logistics steps taken to achieve this ?

Savings could be due to

* Channel options
* Depot checks
* Planning systems
* Intransit stock reduction
* Shared software cost
* Transport rate reduction
* Truck utilisation
* Damages and shortages reduction

1. Optimal distribution network (number of depots): There are optimisation tools available to identify the best distribution channel which, of course, will vary from product to product. (This defines the route the material travels, from manufacturer to the end consumer.)

2. Planning systems: They define the frequency of the material movement from manufacturing locations to consuming centres. There are companies which have a daily planning cycle like the soft drink companies. Many FMCG companies have weekly planning cycles. If you are in foreign exchange forward cover market, your planning cycle could be in minutes.

3. Physical modes: This provides options for transport mode, warehousing systems and the like to ensure better servicing standards.

Source: http://www.thehindu.com/thehindu/biz/2003/12/22/stories/2003122200661600.htm

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