CHAPTER II

LITERATURE REVIEW

2.1 LOGISTICS

2.1.1 MEANING OF LOGISTICS

A widespread idea prevails that logistics is the ‘movement of goods’ that is narrow concept.
Logistics is much more and much wider than mere physical handling of goods. Logistics involves
several other functions such as purchasing, plant location, plant layout, etc., and even the disposal
of wastes. It covers astonishingly varied professional disciplines. They are:

• Facility location

• Forecasting and order management

• Planning

• Transportation : the mode and the route

• Inventory management: all inventories

• Warehousing

• Protective packaging

• Information : maintenance and flow

DEFINITIONS

Many definitions are given for ‘logistics’. Here are some: “Logistics is .......

Strategically managing the procurement and movement of goods and storage of inventory an all
forms.”

The process of strategically managing the procurement ,movement and storage of materials, parts
and finished inventory (and the related information flows) through the organization and its
marketing channels in such a way that current and future profitability are maximized through the
cost-effective fulfillment of orders”

The study and management of goods and service flows and associated information that set these
in motion”

These definitions give the idea of the wide range of functions that logistics covers. A simple
definition is: “Logistics is delivery of the required place, at required time, in required
person......efficiently.”

2.1.2 HISTORY OF LOGISTICS

Logistics can be defined as providing the right type of products and/or services at the right price,
time and in the right condition. A quick look at some logistics history may prove very enlightening.

The birth of Logistics can be traced back to ancient war times of Greek and Roman empires when
military officers titled as ‘Logistikas’ were assigned the duties of providing services related to
supply and distribution of resources. This was done to enable the soldiers to move from their base
position to a new forward position efficiently, which could be a crucial factor in determining the
outcome of wars. This also involved inflicting damage to the supply locations of the enemy and
safeguarding one’s own supply locations. Thus, lead to the development of a new system which
can be related to the current day system of logistics management.

During the Second World War (1939-1945), logistics evolved greatly. The army logistics of United
States and counterparts proved to be more than the German army could handle. The supply
locations of German armed forces were inflicted with serious damages and Germany was not able
to wreak the same havoc on its enemy. The United States military ensured that the services and
supplies were provided at the right time and at the right place. It also tried to provide these services
when and wherever required, in the most optimal and economical manner. The best available
options to do a task were developed. This also gave birth to several military logistics techniques
which are still in use, at best in a more advanced form.

Logistics has now evolved itself as an art and science. However, it cannot be termed as an exact
science. Logistics does not follow a defined set of tables nor it is based on skills inherited from
birth. A logistics manager performs his duties and responsibilities based on his educational
experiences and intuition. These skills are nourished by a constant application of the same by him
for betterment of his organization. The logistics manager ensures that the company is benefited by
an effective and efficient system of logistical management. He also needs to ensure that the right
kind of products and services are provided at the right time and for a right price, whether inside
the organization’s premises or delivery of shipments outside the premises of the organization.

Logistics has come to be kind of relief for many organizations that formerly looked upon it as a
burden. Companies nowadays are hiring people with the requisite knowledge to deliver sustainable
enhancements in the field of supply chain management. As has been the case throughout most of
logistics history, the task of a logistics manager involves a clear vision and a drive within to deliver
results under strict deadlines in addition to his usual responsibilities.

GULF WAR

The idea of what logistics is, from the fact that, in 1991 Gulf War, the US and the allies airlifted
half a million people and over half a million tons of materials over 12,000 km and moved
additional 2.3 million of equipment by sea, in a short time frame. That kind of movement is more
than physical handling. That is logistics.

TYPES OF LOGISTICS

(i) Military Logistics: The design and integration of all aspects of support for the operational
capability of the military forces and their equipment to ensure readiness, reliability and
efficiency.

(ii) Event Logistics: The network of activities, facilities and personnel required to organise,
schedule and deploy the resources for an event to take place and to efficiently withdraw
after the event.

(iii) Service Logistics: The acquisition, scheduling and management of the facilities/assets,
personnel and materials to support and sustain a service operation or business.
CONCEPTS OF LOGISTICS

The concept of logistics is fairly new in the business world. The scope and influence of
logistics has evolved in the late 1940s. In the 1950s and 60s, logistics was used only in military
organisations. The scope of logistics has been extended beyond the army, as it has been
recognised as one of the important tools for developing competitiveness of business
organisations. Competitive advantage means the company has the ability to differentiate itself,
in the eyes of the customer and also is operating a lower cost and greater profit.

Logistics facilitates in getting products and services as and when they are needed and desired
to the customer. It also helps in economic transactions, serving as a major enabler of growth of
trade and commerce in an economy. The role of logistics is to ensure availability of all the
required materials before every step in the supply chain.

The “supply chain” encompasses all activities associated with the flow and transformation of
goods from the raw materials stage to the end user.

There are two major phases that are important in the movement of materials: (1) Materials
management (the physical supply channel) and (2) Physical distribution (physical distribution
channel).

Four key players in the supply chain are:

(i) Suppliers – Vendors, (ii) Manufacturers, (iii) Wholesales and Retailers and (iv)
Customers. The concept of logistics has its base upon the “systems approach”. The core
activities takes place in every supply channel. They contribute the most to the total cost
of logistics or they are essential to the effective coordination and completion of the
logistics task. These are activities include: (i) customer service, (ii) Transportation, (iii)
Inventory management and (iv) Information flow and order processing.

The support activities include: (i) Warehousing, (ii) Materials handling, (iii) Purchasing.
LOGISTICS PERFORMANCE CYCLE

Performance cycle is the primary unit of analysis for integrated logistics. Performance cycles
provide a basic perspective of the dynamic interface and decisions that must link to create an
operating system. At a basic level, suppliers, the firm and its customers are linked together by
communications and transportation. The facility locations that performance cycle link together
are referred to as “nodes”.

In addition to the nodes and links, a logistical performance cycle requires inventory. Within
nodes, inventory is stocked or flows through the node, necessitating a variety of material handling
and at least limited storage.

Performance cycles become dynamic as they accommodate input/output requirements. The input
of a logistical performance cycle is an order that specifies requirements for a product or material.
System output is the level of performance expected from the logistical operation. The
effectiveness and efficiency of performance cycles are key concerns in logistics management.

The logistical performance cycle includes:

1. Procurement performance cycle (Inbound logistics)

2. Manufacturing support performance cycle (In process logistics) and

3. Physical distribution performance cycle (Out bound logistics)

The procurement performance cycle includes: (i) Resource planning, (ii) Supply sourcing,
negotiation, (iii) Order placement, (iv) Quality assurance, (v) Inbound transportation, (vi)
Receiving and inspection, (vii) Storage and handling.

Physical distribution performance cycles involve processing and delivering customer order.
Physical distribution is integral to marketing and sales performance because it provides timely
and economical product availability. From the logistical perspective, physical distribution links
a firm with its customers.
2.1.3 STAGES OF LOGISTICS

INBOUND LOGISTICS

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and
arranging the inbound movement of materials, parts and / or finished inventory from suppliers
to manufacturing or assembly plants, warehouses or retails stores.

Inbound logistics is an integral element of business operations for a manufacturing firm

involving the processes of receiving , storing and distributing raw materials for use in
production. It is the first stage in the value chain.

Procurement logistics is a part of inbound logistics. It consists of activities such as market

research, requirements planning, make-or-buy decisions, supplier management, ordering and
order controlling.

IN-PROCESS LOGISTICS

Also known as production logistics, the term describes logistics process within a value adding
system (e.g., a factory) . Product logistics aims to ensure that each machine and workstation
receives the right product in right quantity and quality at the right time. The concern is with
production, testing, transportation, storage and supply. Production logistics provides the means
to achieve customer response and capital efficiency. Production logistics becomes more
important with decreasing batch sizes. In many industries, the short-term goal is a batch size of
one, allowing even a single customer’s demand to be fulfilled effectively.

OUTBOUND LOGISTICS

Outbound logistics is the process related to the storage and movement of the final product and
related information flows from the end of the production line to the end user.

Distribution logistics is a type of outbound logistics. It has as main tasks, the delivery of
finished products to the customers. It consists of order processing, warehousing and
transportation. Distribution logistics is necessary because the time, place and quantity of
 production differs with the time, place and quantity of consumption.

Disposal logistics has its main function to reduce logistics costs and enhance services related to
the disposal of waste during the operation of a business.

Supply chain partners: Companies work with different supply-chain partners on the inbound and
outbound side of logistics. The inbound side concerns the relationship between companies and
their supplies, while the outbound side deals with how companies get products to their
customers, Regardless of the source or distribution, companies may work directly with third-
party distributors on either side as well. A wholesaler, for example, might work with a distributor
to receive products from an international supplier, while using their own fleet to deliver goods to
their domestic customers.

REVERSE LOGISTICS

Reverse logistics is concerned with issues such as reducing the amount of raw materials or energy
used, recycling, substitution, reusable packaging and disposal in addition to handling product
returns from customers. Since logistics cannot deal effectively with these issues in isolation, it
must be interfaced with manufacturing, marketing, purchasing and packaging engineering.
Decisions made in each of these areas have an impact on the ability of logistics to conserve
resources and achieve green goals of the organization.

The reverse logistics channel may utilize all or a portion of the forward logistics channel or it
may require a separate design. The supply chain terminates with the delivery of the product to
the end customer. The reverse channel must be considered to be within the scope of logistics
planning and control.

The example of reverse logistics activities resulting from return of a defective product is
illustrated in the following paragraph:

• The reverse logistics channel comes into play when a customer buys a product say an
electric iron or a toaster.

• The customer returns it to the retailer who readily refunds the purchase price or replaces
the defective product by a new one as per the terms of purchase.

• The retailer sends the defective product to the wholesaler/distributor or to a central return
 centre. Upon receipt, the product’s Universal Product Code (UPC) is scanned for
identification in the return centre’s database.

• The product is shipped back to the manufacturer.

• The retailer makes a cost recovery for the defective product.

• The manufacturer repairs the product and sends it for resale on the secondary market;
thereby gaining value for the defective product.

DEFINITIONS :

• Reverse logistics stands for all operations related to the reuse of products and materials.
It is the process of planning, implementing and controlling the efficient, cost effective
flow of materials, in-process inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of recapturing value or
proper disposal.

• Reverse logistics is the flow of returned goods by the consumer to a state where the
product is disposed of, repaired, recycled or internally consumed. Because of the strict
norms pertaining to disposition of goods in the high-tech sector, reverse logistics is a
very strategic area.

• Reverse logistics includes all activities associated with a product/service after the point
of sale, the ultimate goal to optimise or make more efficient after-market activity, thus
saving money and environmental resources.

• Other terms synonymous to reverse logistics are : (a) after-market logistics or after-
market supply chain, (b) the reverse supply chain. Types of activity common with
reverse logistics include: logistics, warehousing, repair, refurbishment, recycling, e-
waste, after-market call-centre support, reverse fulfillment, field service etc.

• After-market supply chain refers to an activity or period in time in the product life cycle
after the product leaves the shelf, reaches the consumer and then delivered for reuse in
one form or another to the end consumer. This is synonymous with reverse logistics.
2.2OBJECTIVES OF LOGISTICS MANAGEMENT

The mission of logistics management is to plan and co-ordinate all those activities necessary to
achieve desired levels of delivered service and quality at the lowest possible cost. Hence logistics
must be viewed as the link between the market place and the operating activity of the business.
The following objectives of logistics management are to be achieved by a firm in order to fulfill
its logistics mission:

The objectives which facilitate achievement of the primary or major objective are:

(a) To reduce inventory to the minimum possible level.

(b) To achieve reliable and consistent delivery performance to enhance customer

satisfaction and build long-term customer relationship.

(c) To achieve maximum economy in freight costs.

(d) To ensure minimum or no damage to products during transportation and storage.

(e) To ensure quick response to customer requirements.

Logistical management includes the design and administration of systems to control the flow of
material, work-in-process and finished goods inventory to support business unit strategy. Its
overall goal is to achieve a targeted level of customer service at the lowest possible total cost.
2.3 CHARACTERISTICS

Features

• Convenient returns management options.

• Closed-loop return cycle providing transportation and related warranty information flows.

• Product testing and disposition.

• Inventory replenishment.

• Technical repair and refurbishment services.

• Asset recovery and recycling management.

Benefits

• Streamline returns and credit processes, reduce inventory and increase cash flow.

• Improve productivity through decreased time spent in handling returns.

• Increase efficiency and inventory velocity through the use of repaired parts as a low-
cost source of parts.

• Shrink product obsolescence and asset re-utilisation cycle times.

• Reduce warranty reconciliation expense with automated controls and tighter

accountability.

• Get a reliable source to manage asset recovery and recycling of high-tech products
and components.
2.4 ROLE AND IMPORTANCE OF LOGISTICS

Role of logistics in supply chain management: A supply chain refers to the way that materials
flow through different organisations, starting with raw material and ending with finished products
delivered to the ultimate consumer. Supply Chain Management can be viewed as a pipelines or
conduit for efficient and effective flow of products, services, information from suppliers through
the various intermediate organisations out to the customers. Thus logistics plays important role in
Supply Chain Management.

ROLE OF LOGISTICS IN THE ECONOMY

It is important since,

• It is important expenditure of businesses.

• It supports movement and flow of many economic transactions.

Logistics adds value by creating time utility and place utility. Mainly it supports the time and place
utility. Time utility is the value added by having an item when it is needed, whereas place utility
is having the item or services available where it is needed.

ROLE OF LOGISTICS IN THE ORGANISATION

In recent years, effective logistics management has been recognised as a key opportunity for the
improvement of both the profitability and competitiveness of the organisations. Because of the
importance of customer service, many organisations are adopting it and are making their approach
as customer driven

There is a strong relationship between Logistics and the three critical concepts of marketing i.e.
the Customer Satisfaction, Integrated Effort and Adequate Corporate Profit.
IMPORTANCE OF LOGISTICS

Logistics is the one important function in the business today. No marketing, manufacturing or
project execution can succeed without logistics support. For companies, 10 percent to 35 percent
of gross sales are logistics cost, depending on the business, geography and weight/value ratio.

Logistics is comparatively a new term, but not the operation. Logistics has existed since the
beginning of civilisation. Raw material and finished products had always to be moved, through on
a small scale. Things began changing with the advance in transportation. Population began moving
from rural to urban areas and to business centres. No longer did people live near production centres,
nor did production take place near residence centres. The geographical distance between the
production point and consumption point increased. And logistics gained importance. Another
factor has come into play recently. Since the early 1990’s, the business scene has changed. The
globalisation, the free market and the competition has required that the customer gets the fight
material, at the right time, at the right point and in the right condition....at the lowest cost.

• Logistics is the bed rock of trade and business, without selling and or buying there can be
no trade and business. Buying and or selling takes place only when goods are physically
moved into and or away from the market. Take away logistical support trade and business
will collapse.

• Leads to customer satisfaction through superior customer service. Organisational

objectives of P [Productivity], Q [Quality], C [Cost], D [Delivery], E [Employee Morale],
F [Flexibility], S [Safety], H [Health], E [Environment] are set to meet customer
expectations of P, Q,C,D,E,F,S,H,E are parts of must be quality that a customer expects.
Logistics addresses D, F objectives which lead to satisfaction through superior customer
service.

• Integrates logistical activities in a conventional management environment, various

activities of logistics work is isolation under different management functions. Each pocket
trying to sub optimizes its objectives at the cost of overall organizational objectives.
Purchasing trying to purchase at minimum price at the cost of what is needed by operations.
Operations produce large quantities at minimum production cost ignoring demand leading
 to doom inventory. Logistics function of management brings all such functions under one
umbrella pulling down inter departmental barriers.

• Competitive edge: In the fiercely competitive environment logistics provides the edge. Due
to technological revolution most of the products are moving into commodity markets. In a
commodity market where price is controlled by competition, where there is no product
differentiation in terms of quality parameters like performance & reliability, where brands
are almost irrelevant, competitive edge is that of availability of product and service in terms
of time, place and quantity.

• Logistics wins or loses wars; British lost American of Independence due to poor logistic
Rommel was beaten in the desert by superior logistics of Allies.

Supports critical functions like operation and marketing strong logistics support enables a
company to move towards JUST IN TIME production system for survival in a highly competitive
market.

LOGISTICS MANAGEMENT IN AN ORGANIZATION

Fig 1 Logistics Management In An Organization

IMPORTANCE OF LOGISTICS MANAGEMENT IN INDIA

• Liberalization and opening our door to door competition.

• Global business has long supply &distribution lines.

• Changing Indian customer, aware, demanding and less brand loyal.

• Competition ensures that product differentiation in terms of quality is difficult.

• Product life cycles are shrinking.

• Our markets are shifting from ‘sellers to buyers’.

• Many consumer products are moving into commodities market.

• India is a large country. Large distances separate production and consumption centres.
Essential commodities have to travel from Food Corporation warehouses to consumers
through PDS.

• Logistics performance has not been impressive.

• Fruits and vegetables are grown at various places but do not enjoy access to market.

2.5 PROCESS

INBOUND LOGISTICS

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and
arranging the inbound movement of materials, parts and / or finished inventory from suppliers
to manufacturing or assembly plants, warehouses or retails stores.

Inbound logistics is an integral element of business operations for a manufacturing firm

involving the processes of receiving , storing and distributing raw materials for use in
production. It is the first stage in the value chain.

Procurement logistics is a part of inbound logistics. It consists of activities such as market

research, requirements planning, make-or-buy decisions, supplier management, ordering and
 order controlling.

IN-PROCESS LOGISTICS

Also known as production logistics, the term describes logistics process within a value adding
system (e.g., a factory) . Product logistics aims to ensure that each machine and workstation
receives the right product in right quantity and quality at the right time. The concern is with
production, testing, transportation, storage and supply. Production logistics provides the means
to achieve customer response and capital efficiency. Production logistics becomes more
important with decreasing batch sizes. In many industries, the short-term goal is a batch size of
one, allowing even a single customer’s demand to be fulfilled effectively.

OUTBOUND LOGISTICS

Outbound logistics is the process related to the storage and movement of the final product and
related information flows from the end of the production line to the end user.

Distribution logistics is a type of outbound logistics. It has as main tasks, the delivery of
finished products to the customers. It consists of order processing, warehousing and
transportation. Distribution logistics is necessary because the time, place and quantity of
production differs with the time, place and quantity of consumption.

Disposal logistics has its main function to reduce logistics costs and enhance services related to

the disposal of waste during the operation of a business.

Supply chain partners: Companies work with different supply-chain partners on the inbound and
outbound side of logistics. The inbound side concerns the relationship between companies and
their supplies, while the outbound side deals with how companies get products to their
customers, Regardless of the source or distribution, companies may work directly with third-
party distributors on either side as well. A wholesaler, for example, might work with a distributor
to receive products from an international supplier, while using their own fleet to deliver goods to
their domestic customers.

REVERSE LOGISTICS

Reverse logistics is concerned with issues such as reducing the amount of raw materials or energy
used, recycling, substitution, reusable packaging and disposal in addition to handling product
returns from customers. Since logistics cannot deal effectively with these issues in isolation, it
must be interfaced with manufacturing, marketing, purchasing and packaging engineering.
Decisions made in each of these areas have an impact on the ability of logistics to conserve
resources and achieve green goals of the organization.

The reverse logistics channel may utilize all or a portion of the forward logistics channel or it
may require a separate design. The supply chain terminates with the delivery of the product to
the end customer. The reverse channel must be considered to be within the scope of logistics
planning and control.

The example of reverse logistics activities resulting from return of a defective product is
illustrated in the following paragraph:

• The reverse logistics channel comes into play when a customer buys a product say an
electric iron or a toaster.

• The customer returns it to the retailer who readily refunds the purchase price or replaces
the defective product by a new one as per the terms of purchase.

• The retailer sends the defective product to the wholesaler/distributor or to a central return
centre. Upon receipt, the product’s Universal Product Code (UPC) is scanned for
identification in the return centre’s database

• The product is shipped back to the manufacturer.

• The retailer makes a cost recovery for the defective product.

• The manufacturer repairs the product and sends it for resale on the secondary market;
thereby gaining value for the defective product.

DEFINITIONS :

• Reverse logistics stands for all operations related to the reuse of products and materials.
It is the process of planning, implementing and controlling the efficient, cost effective
flow of materials, in-process inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of recapturing value or
 proper disposal.

• Reverse logistics is the flow of returned goods by the consumer to a state where the
product is disposed of, repaired, recycled or internally consumed. Because of the strict
norms pertaining to disposition of goods in the high-tech sector, reverse logistics is a
very strategic area.

• Reverse logistics includes all activities associated with a product/service after the point
of sale, the ultimate goal to optimise or make more efficient after-market activity, thus
saving money and environmental resources.

• Other terms synonymous to reverse logistics are : (a) after-market logistics or after-
market supply chain, (b) the reverse supply chain. Types of activity common with
reverse logistics include: logistics, warehousing, repair, refurbishment, recycling, e-
waste, after-market call-centre support, reverse fulfillment, field service etc.

• After-market supply chain refers to an activity or period in time in the product life cycle
after the product leaves the shelf, reaches the consumer and then delivered for reuse in
one form or another to the end consumer. This is synonymous with reverse logistics.

2.6 METHODS

LOGISTICS COST OPTIMIZATION TO CREATE PROFITS

According to the CSCMP’s “State of Logistics” Report from 2015, logistics costs now make up
over 8% of the GDP. Any percentage less for your business with logistics costs as a percent of
your revenue, goes straight to the bottom line.

An essential ingredient to logistics cost reduction “Treat people well and profits will follow.
Listen to your people. They have great ideas.”
LOGISTICS COST REDUCTION BY

FOCUSING ON SAFETY

First and foremost, shippers and logistics provider must understand safety/OSHA considerations.
Ensure that your warehouse operation is safe. Be proactive with safety. Avoid injuries that could
cost the company a lot of money. Stay away from OSHA fines. If you have too many safety issues,
OSHA can shut your operation down. Have someone, like a Safety Manager, be accountable and
responsible for safety and ongoing safety training.

FOCUS ON LABOR COSTS

Analyze labor reduction for any warehousing operation. Every project should focus on labor costs.
There are Labor Management Software systems that can help manage work in the warehouse.
Incentive programs for warehousing employees do work. So do projects that automate repetitive,
structured tasks, like light or voice-directed picking, carousel storage, robotics, etc. Try warehouse
mobility in your four walls. You will reduce overhead costs. It will increase individual
productivity; you need fewer staff members and less equipment.

FOCUS ON PREVENTATIVE MAINTENANCE

To save money on any equipment, implement Preventative Maintenance as a way to achieve

logistics cost reduction. Reactive fixes/maintenance do not work. In the middle of a job, you have

an equipment breakdown. This can be costly in man hours, customer service (goods needed cannot
be processed), accidents (safety): unloading a container and the forklift dies: the pallet slips off the
forklift tines which can injure employees.

FOCUS ON THE USE OF SYSTEMS & TACTICAL TECHNOLOGY

Productivity increases from wearable voice command tools can increase factory warehouse
efficiencies up to 30 percent, according to an article in Supply Chain Management Review.
An excellent Warehouse Management System (WMS) can help reduce costs by automating cycle
counting, and maintaining location control. The layout of your warehouse can save you money.
Try a velocity layout. Product slotting, or having top demand SKUs near shipping, will reduce the
cost of picking and put away. When demand changes, you have to re-slot.

Don’t forget to switch to high-efficiency lighting in the warehouse to save money.

What does the future hold for Warehousing: look to Robotics. This emerging trend of technology
use will continue to weed out inefficiencies and further logistics cost reduction but also allow for
a more strategic mindset in logistics.

Anything that reduces returns, Return Merchandise Authorizations (RMAs), Return to Vendor
(RTV) or Reverse Logistics systems can aid in logistics cost reduction. A cross-functional
Material Review Board (MRB) will reduce the need for additional space by reviewing obsolete,
non-moving and slow moving inventory monthly, and sending disposition recommendations to
top management. Take the necessary time to include MRB monthly.

A Transportation Management System (TMS) optimizes freight to utilize the most effective lanes
and routes.

For companies to reduce logistics costs consider automation. Use a Warehouse Execution System
(WES) combining WMS and a Warehouse Control System (WCS). Regulating, automating, and
optimizing manual processes can reduce staff requirements, centralize production operations to
lower-cost areas and create a more proactive approach to ensuring customer satisfaction. With an

automated, cost-effective transportation and logistics system, a company can implement major
strategic changes to provide visibility, reduce costs and increase customer service levels.

FOCUS ON SUPPLIERS FOR LOGISTICS COST REDUCTION

The best suppyl chain or logistics cost reduction tip is this: Collaborate and partner with Suppliers
to help reduce costs. Suppliers can sometimes absorb direct logistics costs. Create a consortium of
buyers (a client and several of their suppliers) to buy needed logistics supplies (i.e. transportation
fuel) at a reduced cost that comes with buying in greater quantities.
Be bold and try the Supplier Day Conference invite suppliers to your facility with a structured
agenda. One topic is to Value Analyze your products and for all involved to submit logistics cost
reduction ideas. The Supplier is the specialist in their area of expertise. They can help by working
with you and being creative in a win-win cost reduction program. Retain the function of a part, but
reduce the costs of components, never jeopardizing quality.

FOCUS ON THE CUSTOMER

Keeping the per order cost of logistics support low requires keeping customers happy (so
companies retain them as customers). By going beyond the customers’ expectation, companies can
keep business up and spreads out the burden of logistics cost reduction over a greater number of
orders/customers. Because of this direct correlation between customer satisfaction and overall cost
reduction, customer service should be factored into any measurement of changes in logistics costs
accordingly.

2.7 MODELS

Modeling Techniques

The use of modeling techniques is important to companies who are deciding upon their
new logistics network. The various modeling techniques can allow companies to look at a
comparison of the functioning, cost efficiency, and customer service efficiency of the
various logistics networks that have been proposed. Companies can look at the various
modeling techniques and decide which one offers them the best insight into their network
options.
Optimization Modeling

The optimization model is derived from the precise mathematical procedures that offer the best or
optimum solution based on the mathematical formula used. This model is based on mathematical
formula only.

This means that there is no subjective input to the model, only assumptions and data. The
optimization model looks at data such as the level of customer service to be obtained, the number
and location of distribution centers, the number of manufacturing plants, the number of distribution
centers assigned to a manufacturing plant, and the inventories that must be maintained.

One optimization model that has been used for logistics networks is the model using linear
programming, sometimes referred to as LP. This is particularly useful for linking supply and
demand limitations of manufacturing plants, distribution centers, and market areas.

Given the goal of minimizing costs, linear programming can define the optimum facility
distribution pattern, based on the constraints identified. However, as this uses mathematical
formulas, there is no allowance for any subjective input.

Simulation Models

A simulation model is defined as creating a model that is based on the real world. When
the model has been created, you can perform experiments on the model to see how changes
made to the model can affect the overall cost of the logistics network.

For example, by changing the constraints on the network, it is possible using a simulation
model to see how this affects the cost-effectiveness of the overall network.

For a simulation model to be effective, you need to collect significant amounts of data on
transportation, warehousing, labor costs, material handling, and inventory levels, so that

when you make changes to the constraints, the model accurately reflect the changes.
However, the changes to the simulation model will not produce the optimum logistics
network, as produced by the optimization model; it will just evaluate the changes that were
made to the model. This type of model is very useful when companies have made general
decisions on the network and want to see what the overall effect of any changes will be.

Heuristic Model

Similar to simulation models, heuristic models do not generate an optimum solution for a
logistics network.
A heuristic model is used to reduce a large problem to a more manageable size. It has to be
understood that heuristic models do not guarantee a solution and that a number of heuristic
models may contradict or give different answers to the same question and still be useful to
the overall creation of a logistics network.

Heuristic models are often referred to a "rule of thumb" which can be useful in creating
a logistics network.

For example, a heuristic model can be used to consider the best site for a distribution center
that is at least ten miles from the market area, fifty miles from a major airport, and more
than three hundred miles from the next closest distribution center. A heuristic model will
look at all areas that fit within the parameters defined and finds the areas best suited.
2.8 MERITS / DEMERITS

2.8.1 MERITS

 Allows focus on core competences

 management capabilities
 Save costs and time

 Reduce heavy assets investment

 Increase flexibility and agility
 Increase efficiency
 Value-added services and service variety
 Increase global inventory visibility
 Share responsibilities and reduce risks
 Economies of scale
 Share knowledge and experience

2.8.2DEMERITS

 Poor worker quality

 Poor service levels
 Misleading feedbacks
 Coordination problems
 Environmental responsibilities
 Power of control
2.9 ARTICLES REVIEWED

Fernie and Spark (1998) explained the importance of technology in enhancing logistics
efficiency. They highlight the way in which breakthroughs in technology and IT have contributed
in facilitating logistical efficiency in the distribution network. Technological innovations in
material handling and communication can substantially improve the flow of information through
the supply chain.

Stock, and Lambert (2001) explained the importance of logistics and logistics cost savings of
firms. They suggest that logistics costs savings can have a greater impact on firm`s profitability
than increase in sales volume can. Logistics also plays an equally important role in generating
value advantage by the creation of product’s time and place utilities.

According to Krishnaveni Muthiah (2002) cargo handling infrastructure at the major airports in
India is severely crippled by factors such as lack of modernization, particularly inadequate space,
lack of proper cold storage facilities, outdated equipment, pilferage and theft.

Sahay and Mohan R (2003) discussed the spending of India on logistics costs. They state that
the Indian industry spends an exceptionally high amount of its gross domestic product (GDP) on
logistics. India’s logistics cost has been estimated to be around 14 per cent of its GDP, out of
which 40 per cent can be attributed to transportation alone.

Andreea Popescu(2006) provided valuable strategies for more efficient management of revenues
and capacity for airlines and freight forwarders. The objective of his study was to develop
methods to improve both freight forwarders and airlines, action when dealing with air cargo.

Sahay B.S (2006) studied the current state of supply chain management practices followed in
Indian organizations. The objective of the study is to identify the important areas that need
improvement in order to gain competitive advantage. The findings of the study reveal that most
of Indian organizations have aligned their supply chain objectives with their business objectives.
Chiu (1995) examines the critical success factor in effective logistics management. He opines
that the critical success factors in logistics management include good planning of the logistics
system, a well-designed distribution organization, the prudent selection of allied companies, a
close relationship with trading partners, good logistics investment analysis, the elimination of
barriers to logistics management, commitment of top management and continuous improvement
in logistics.

Stock, and Lambert (2001) explain the importance of logistics and logistics cost savings of
firms. They suggest that logistics costs savings can have a greater impact on firm`s profitability
than increase in sales volume can. Logistics also plays an equally important role in generating
value advantage by the creation of product’s time and place utilities.

Vijaya raghavan (2001) focuses on the importance of transportation in logistics. He states that
transportation is the backbone of the entire supply chain. Transportation makes it possible for a
company to achieve the well- known seven ‘R’s—the Right product in the Right quantity and the
Right condition, at the Right place, at the Right time for the Right customer at the Right cost.

Kemthose P. Paul (2003) identifies IT as the mainstay of supply chain management. Planning
and control functions performed by logistics managers rely on quick, accurate and relevant data.
So building an information system for data capture, storage, and use is a pre-requisite of any
good modern supply chain management system. He also recommends an efficient software
system to support a well-designed supply chain system.

Mc. Kinnon (2004) identifies certain features pertaining to airports competition viz. 1) location,
airports located closer to shipper enjoy the advantages of time and cost, 2) airport infrastructure
including runway capacity, terminal setup and transport connectivity,3) airport charges, 4)
customs rules and charges 5) congestion and lack of slot availability 6) Choice and quality of
freight forwarders 7) environmental restrictions such as noise limits and night curfew and 8)
regulatory restrictions.

Satish C Ailawadi & Rakesh Singh (2005) point out that the concept of logistics was
introduced due to the need for planning and coordinating the material flow from source to user as
an integrated system rather than as a series of independent activities. They also point out that the
objective of logistics is to provide higher levels of service to the consumer at more affordable
costs by linking the market place, the distribution network, the manufacturing process and
procurement activity. The logistics competency is achieved by coordinating the fundamental
areas such as network design, information, transportation, inventory, warehousing, material
handling and packaging.
Morrell (2011) pointed out that Air transport provides a suitable way of transport for special
types of freight such as emergency freight (spare parts, documents), high-value freight (e.g. gold,
currency, and artwork) and perishables (pharmaceuticals, fresh food, cut flowers). Because these
products have very short shelf life, they benefit from fast transit times.

Shaw (2007) pointed out that Air transport is also responsible for most of the value added. As
stated by Boeing, even though air freight accounts for fewer than 2 per cent of total tonnage
transported, it represents almost 40 percent of aggregate value of total world trade, proving that it
is a link of paramount importance for the global supply chains. This shows the very high value to
weight ratio that characterizes air freight shipments, a fact that is expected when one considers
that the transport costs by air can be up to ten times higher than those of other modes.
.