So, just what is Logistics anyways? Logistics is a technical-sounding term for what is a fairly simple concept. When used in a business context, it refers to the process of ensuring the right items are in the right place at the right time. It actually originated as an aspect of military service, concerned with ensuring that essential supplies, including personnel, were procured from the right sources, and transported to the parts of the front line where they were most needed. Nowadays, although the term is still used by the military, it is much more often found in the business sense.
The Supply Chain
More often than not, when used with reference to business, the term occurs in conjunction with the term supply chain, or supply chain management. This is because any company that is concerned with the manufacture and supply of physical products has to deal with a linear process, starting with the sourcing of the materials used to make the products, right through manufacture, to storage and warehousing, through to their final destination – delivery to the customer. This process is the supply chain, and the term logistics refers to the science of ensuring that the movements to and from each segment of the chain are carried out as efficiently and economically as possible.
Although the basic concept of logistics is fairly simple, its execution in modern industry can appear increasingly complex. The functions of materials handling, transportation, inventory management, packaging and warehousing are all becoming more technical, and in addition all these functions need to be integrated into a single coordinated endeavor. To do this, accurate information needs to be obtained from each separate function. Nowadays, the most efficient way of obtaining and collating this information is through computer software, and the science of coordinating the different functions is known as logistics management. This is now a profession in its own right. The terms logistics management and supply chain management are often used interchangeably, although more accurately logistics management is just one component of supply chain management.
Strategic, Tactical And Operational Levels
It is usually recognized that logistics management can be carried out at several levels – strategic level, tactical level and operational level – depending on which section of the company is making the decisions. At the strategic level, the senior management has to make the decisions about the overall management and design of the logistics network, such as the locations of warehouses and distribution centers, and which transportation methods should be used. Tactical level decisions are more often made at the local or regional level, and focus on the measures that need to be adopted in order to maximize cost benefit for the company. For instance, whereas the overall company policy may be to construct its own warehouses, a tactical decision could be made to rent local warehouses, in an area where construction costs might be prohibitive. Decisions at the operational level affect the basic day-to-day management of the logistics functions. The operational decisions will keep within the strategic and tactical framework, while at the same time ensuring that movements are carried out with the maximum efficiency.
Third Party Outsourcing
One area of logistics that particularly highlights the three levels of decision making is third party logistics, or 3PL. There is an increasing tendency nowadays on the part of manufacturing companies to outsource, or subcontract, their logistics functions to outside companies, rather than doing everything in-house. For this reason, an increasing number of specialist companies now exist for the specific purpose of carrying out particular logistics functions for other companies.
The decision as to whether this outsourcing is in the best interests of the company will be made by senior management at the strategic level. However, even where a strategic decision has been made to retain logistics functions in-house, a tactical decision may be made to outsource in a particular region where fuel or transportation costs may be exceptionally high, so that it is clear that 3PL will bring cost benefits at this level. Similarly, a strategic decision may have been made to integrate particular 3PL companies into the supply chain, but in some areas these companies may not operate, or may not have a good reputation. In this situation, an operational decision may be made by local management to use local companies instead.
From Local To Strategic
As a rule, tactical and operational logistics decisions are made within the framework laid down at the strategic level. However, in some cases the process can move in the opposite direction, where, for example, a local decision may be made to hire a particular company to carry out basic deliveries at the local level. As confidence in the company grows, this relationship can expand and develop into a strategic relationship. The outcome might be that the whole management of the function will be outsourced to this third party company, with great mutual benefit to both sides.
At every level, the logistics function of the company is a crucial element of the supply chain management, which embraces the entire operation from sourcing materials to the final customer. However, in the modern industrial scene, supply chains continually evolve and change. To deal with this process of change, a company needs to develop its own logistics strategy, so it can ensure that service levels are not reduced, whatever changes take place. The strategy will involve structural issues, including which products are manufactured at which plant, and the number and location of distribution centers and warehouses, and also an implementation plan, including the ongoing development and improvement of information systems. The overall objective of a strategy is to ensure that the operation delivers the maximum cost benefits, and is in line with the objectives and goals of the organization.
A Crucial Function
The fact is that the success of any manufacturing company depends entirely on the quality of its order fulfillment, and its level of customer satisfaction. For this reason, the logistics function, whether in-house or outsourced, is crucial to the company’s operation. The logistics operation is a distinct entity, but it can only contribute to the success of the company if it is fully integrated with all the other functions, including manufacturing, marketing, sales and human resources.