The Role of Logistics in the Int’l Economy

The growing wealth of trade has led to rising national and international markets for goods and services. Thousands of new goods and services have been introduced in the past and are presently sold and circulated to consumers in every area of the world. To gather the challenges of extended markets and the increase of new products and services, business have increased in volume and complication. Multiple-plant operations have replaced single plants. The distribution of products from point-of-origin to point-of-consumption has become an enormously important component of the Gross Domestic Product (GDP) of developed nations. Considering its utilization of land, labor, and capital, and its impact on the standard of living, logistics is clearly big business.

Logistics as a Significant Component in National and International Economy

As a significant component, logistics affects the rate of inflation, interest, productivity, energy costs and availability, and other aspects of the economy. Improvements in a nation’s productivity have positive effects on the prices paid for goods and services, the balance of national payments, currency valuation, the ability to compete effectively in global markets, industry profits (higher productivity implies lower costs of operation to produce and distribute an equivalent amount of product), the availability of investment capital, and economic growth leading to a higher level of employment. Perhaps the best way to illustrate the role of logistics in economy is to compare logistical expenditures with other shared activities. The amount spent on logistics is higher than what have been spent on advertising, twice that spent on national defense and equal to that spent on medical care.

Logistics also supports the movement and flow of many economic transactions; it is an important activity in facilitating the sale of virtually all goods and services. To understand this role from a systems perspective, consider that if goods do not arrive on time, customers cannot buy them. If goods do not arrive in the proper place, or in the proper condition, no sale can be made and thus all economic activity throughout the supply chain will suffer.

Logistics’ Role in the Organization

In recent years, effective logistics management has been recognized as a key element in improving both the profitability and the competitive performance of firms. In the late 1980s and early 1990s, customer service took center stage in many organizations. Even organizations that had previously adhered to the “marketing concept” were reexamining what it meant to be customer driven. The trend toward a strong customer focus continues today. Coupled with operational efficiencies and effectiveness, a marketing orientation provides organizations with opportunities to gain competitive advantage.

Logistics Leads to Competitive Advantage

The marketing concept is a “marketing management philosophy that holds that achieving organizational goals depends on determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors. In other words, the marketing concept holds that a business exists to meet customer needs. The three critical elements of the marketing concept are “customer satisfaction”, “integrated effort” and “company profit”. Logistics plays a key in order for a firm to be successful, any marketing effort must integrate the ideas of having the right product, at the right price, combined with the right promotion, and available in the right place—these are the four Ps of the marketing merge. Logistics plays a critical role, particularly in support of getting the product to the right place. As we will note with regard to utility creation, a product or service provides customer satisfaction only if it is available to the customer when and where it is needed. Achieving customer satisfaction requires an integrated effort both internally and externally (with suppliers and ultimate customers).

Product.

Product refers to the set of utilities or characteristics a customer receives as a result of a purchase. In an effort to lower price, management may decide to reduce product quality, eliminate product features, reduce the breadth of product offerings, reduce customer service or warranty support, or increase the time between model changes. However, any of these actions may reduce the attraction of the product for consumers, creating a loss of customers and thereby a reduction in long-term profits. To avoid making poor decisions, management needs to understand the trade-offs and interrelationships between logistics and other marketing activities.

Pricing Considerations

The amount of money a customer pays for a product or service is typically referred to as its price. Price factors include discounts for buying in quantities or for role in each of these elements in several ways belonging to a certain class of customers, discounts for prompt payment, rebates, consignment arrangements, and delivery costs.

A supplier may attempt to increase sales by reducing the price of its product or by changing the terms or service offering. Unless demand for the item in question is very elastic (that is, sales change dramatically due to changes in price), such a strategy may create higher unit sales but not necessarily higher profit—the sales may not increase enough to offset the lower price. This is particularly true in mature industries, where customer demand is relatively fixed and the competition may follow the price decrease. In such cases the sales and the profitability of the entire industry may suffer.

Promotion.

Promotion of a product or service encompasses both personal selling and advertising. Whereas increasing advertising expenditures or the size of the direct sales force can have a positive impact on sales, there is a point of diminishing returns. At this point, the extra money being spent does not yield high enough increases in sales and/or profits to justify the added expense. It is important for organizations to understand when they reach this point so that they can avoid misallocating funds.

A prudent idea may be to reallocate extra advertising funds to, perhaps, employee training.

Selling Value-Added to Customers

The sales force, for example, could be trained to provide more value-added services to the customer or to make the customer more aware of the value-added the firm currently provides through superior logistics.

Place,  

Customer Service is an Output of the Logistics System

Expenditures in the place component of the marketing mix support the levels of customer service provided by the organization. This includes on-time delivery, high           order-fill rates, and consistent transit times. Customer service is an output of the logistics system and represents the firm’s expenditure for logistics. On the other hand, when the organization performs well on all the elements of the marketing mix, customer satisfaction occurs.

For many organizations, customer service may be a key to gaining competitive advantage. By adjusting customer service levels to meet what the customer desires and is willing to pay for, the organization may simultaneously improve service levels and reduce costs. All of the logistics trade-offs must be considered in terms of their impact on customer service. In order to accomplish this analysis, the total cost concept must be used.

Additionally, when combined with operational efficiencies and effectiveness from the adoption and implementation of technology and various management strategies such as supply chain management (SCM), total quality management (TQM), just-in time (JIT), and quick response (QR), organizations can develop competitive advantage. Technology and management strategies will be discussed later in this chapter and throughout this text.

Logistics Adds Time and Place Utility

Manufactured products possess some value or utility because an assembled item is worth more than its unassembled components or raw materials. A completed automobile, for example, is much more valuable to a consumer than its unassembled parts would be. The value, or utility, of making materials available in a completed state is called form utility. To the customer, however, the product not only must have form utility but also must be in the right place, at the right time, and be available to purchase. The value added to products beyond that added by manufacturing (form utility) may be called place, time, or possession utility. The logistics activity provides place and time utility, while other marketing activities provide possession utility.

Management is quite concerned with the value added by logistics, because improvements in place and time utility are ultimately reflected in the firm’s profits. Both cost savings in logistics and a stronger marketing position due to an improved logistics system can cause improved bottom-line performance. The more logistics contributes to the value of a product, the more important logistics management is.

Place Utility is the value created or added to a product by making it available for purchase or consumption in the right place. Logistics is directly responsible for adding place utility to products as it efficiently moves raw materials, in-process inventory, and

Time Utility is the finished goods from point-of-origin to point-of-consumption.

Time utility is the value created by making something available at the right time. Products are not as valuable to customers if they are not available precisely when they are needed. For example, a food-processing company must have raw materials (food items), packaging materials, and other items available before the production process begins or, if already begun, before existing supplies run out. Failure to receive these items at the proper time can cause costly production shutdowns and place the firm at a competitive disadvantage. As the remaining chapters of this book will show, logistics activities combine to add place and time utility to products.

Possession Utility

Possession utility is the value added to a product by allowing the customer to take ownership of the item. Possession utility is a result not of logistics but of the offering of credit, quantity discounts, and delayed payments that enable the customer to assume possession of the product. The logistics and marketing processes culminate in possession utility.

Logistics Allows Efficient Movement to the Customer

Five Rights of a Logistics System

“five rights” of a logistics system are supplying the right product at the right place at the right time in the right condition for the right cost  those customers consuming the product.

The term right cost deserves consideration.

The first four rights are analogous to form, time, place, and possession utilities created by manufacturing and marketing, the addition of the cost component is immensely important to the logistics process.

Improvements in marketing efficiency and reductions in marketing costs still lie in the future, representing a major frontier for cost economies. There is room for substantial improvement, particularly in the performance of the physical distribution functions of marketing which constitute a major part of the total marketing costs.

Logistics is a Proprietary Asset

An efficient and economical logistics system is similar to a tangible asset on a corporation’s books. Logistics competency cannot be readily duplicated by the firm’s competitors. If a company can provide its customers with products quickly and at low cost, it can gain market share advantages over its competitors. It might be able either to sell its product at a lower cost as a result of logistics efficiencies or to provide a higher level of customer service, thereby creating goodwill. Although no organizations presently identify this “asset” on their balance sheets, it theoretically could be shown as an intangible asset, a category that includes such items as patents, copyrights, and trademarks.

Technology

Computer technology and distribution software are two other factors that have caused businesses to become more interested in logistics management. The development of computer technology, particularly the microcomputer, has allowed executives to implement logistics management much more effectively and efficiently than ever before. Firms can improve their cost efficiency because of the speed and accuracy of the computer; they can use sophisticated techniques to manage and control activities such as production scheduling, inventory control, and order processing. In fact, such advances, and the resulting impact on the firm’s marketing, production, and financial activities, have been instrumental in creating top management awareness of logistics.

Factors Underlying the Development of Interest in Logistics Management

A number of factors underlie the recognition of the importance of logistics management: advances in computer technology and quantitative techniques; development of the systems approach and total cost analysis concept; recognition of logistics’ role in the firm’s customer service program; erosion of many firms’ profits because of their failure to examine functional areas where cost savings might be realized profit leverage resulting from increased logistics efficiency general economic conditions and recognition that logistics can help create a competitive advantage in the marketplace.

source: McGraw-Hill Int’l Edition (J. R. Stock & D. M. Lambert)