The Logistics of Supply Chain Management

Definition of Logistics and Supply Chain Management

There are several definitions of logistics and supply chain functions, and many intermix both actions to the extent that, in some organisations, it would only be just possible to distinguish between them. However, many people refer to the following definitions:

• Supply chain management refers to the sequence and flow of information, materials, and finances from the origin of the goods (raw materials) to the final consumption of the finished goods (finished products). It includes all the organisations through which the materials flow, including the organisation's suppliers or customers, to the point where the public purchases the goods.

• Logistics refers to the transit and movement of goods from the organisation's suppliers into, through, and out of the organisation to the point where the finished goods are delivered to the organisation's customers. It includes the movement of materials through all the organisation's sites, but not that of the organisation's suppliers or customers.

Supply Chain Efficiency

If we take the definition of logistics above, the principal aims of the organisation's logistics function are to:

• Manage the flow of materials through the organisation's sites.

• To increase the efficiency of material movements and flows to minimise costs.

The concept of "efficiency" in logistics requires further clarification. Some interpret it as reducing costs, waste, and time in material flow. In contrast, others see it as maximising customer service, with cost management being essential but not at the expense of customer satisfaction.

It is crucial for the logistics strategy to align with the organisation's mission statement and sales policy to meet customer needs effectively at a reasonable cost. This alignment ensures that the organisation's commitment to its customers is upheld through the logistics function's actions.

As part of supply chain management, logistics involves sequencing, planning, implementing, and controlling the flow and storage of products, services, and information from origin to consumption to meet customer demands efficiently and effectively.

The Movement of Inventory

Supply chain management encompasses the movement of products or services through various organisations within the supply chain to reach the end consumer. The complexity of the supply chain varies depending on the industrial sector and the specific products or services involved.

Logistics refers to the movement of products, inventory, or services into (inbound), through (materials handling) and out (outbound) of an organisation and deals with the following elements of the supply chain:

• Inward transport (inbound logistics from suppliers).

• Receiving (goods in).

• Warehousing or stores (warehouse management).

• Stock control (inventory management).

• Order picking (order assembly).

• Materials handling (into, from and between processes).

• Outward transport (outbound logistics, delivering to customers).

• Physical distribution management (delivery to customers or consumers).

• Recycling, returns, and waste disposal (reverse logistics).

• Location (management of materials flows between the organisation's sites).

• Communication (management of inventory data and order tracking).

The function of logistics depends on how it is managed and organised within an organisation, and it may or may not encompass all the elements mentioned above. Logistics could also involve other aspects of the supply chain, such as purchasing or procurement. However, purchasing and procurement are separate functions that collaborate closely with logistics.

Electronic Point of Sale Technology

Ordering or purchasing the exact amount of inventory needed to fulfil daily orders originated in the farming industry, where food distributors aimed to reduce food wastage. Supermarket chains used electronic point of sale (EPOS) technology to order food products until 17:00 on day one for overnight delivery to the food distributors' sorting hub. The food inventory would then be sorted into distribution routes and delivered to the supermarkets by 08:00 on day two.

Various theories exist regarding the origins of cross-docking. However, cross-docking originated as a transport process when parcel services began handling the delivery of packages for the public. It involved collecting packages, bringing them to a central sorting hub, re-sorting them for delivery routes, and then delivering them to their final destination without storing them.

The hub was a covered location for unloading, sorting, and reloading vehicles. Cross-docking involves moving materials or customer orders through an organisation without physically storing inventory. The organisation manages customer sales orders and purchase order processing elements in a stockless operation.

Managed inventory is a crucial part of logistics within an organisation, enabling it to decouple the vagaries of demand from the fulfilment of customer sales orders. Inventory allows customer sales orders to be fulfilled within an organisation's customers' requirements.

It is a resource that will enable the "oil" on the conveyor belt movement of products or services to smooth the flow of goods through the organisation at minimum cost whilst achieving the highest levels of customer service.

However, the amount of inventory an organisation invests in is directly proportional to the level of customer service it can achieve. The higher the level of inventory, the higher the level of service that an organisation can achieve.

Inventory Control

If the amount of inventory is allowed to increase unchecked, the organisation's cash flow and profitability will be compromised to the extent that the organisation's commercial viability could be put at risk. The role of logistics is to manage the amount of inventory to maximise customer service while minimising the amount of inventory to protect the organisation's financial resources.

In managing the amount of inventory within the organisation, the logistics function manages the resources of inventory by:

• Creating an inventory policy that guides the purchasing function to manage the goods the organisation makes to maximise customer service through the minimum amount of inventory, thus reducing the costs of and capital tied up in inventory.

• Monitoring the amount of raw materials, parts, sub-assemblies, and finished goods by setting minimum, maximum, reorder points, and batch quantities to be purchased.

• Auditing the overall costs of inventory, such as capital tied up in stock, wastage through obsolescence, damages, pilferage, packaging materials used and the utilisation of storage facilities to reduce costs to a minimum whilst maximising the utility of stock.

• Administering stock levels to ensure that sales order processing and purchase order costs are minimised regarding the resources used to receive, store, and assemble customer orders. This includes minimising the inbound and outbound transport costs of transporting the inventory from the supply base to the customer.

• Controlling the receipt, storage, and picking of inventory to ensure the timely dispatch of customer sales orders so that customers receive their products or services within the time parameters that they have requested.

• Acting to maximise customer service to the mutual benefit of customers and the organisation, ensuring turnover, sales, and profitability levels are achieved and maximised to guarantee the long-term commercial viability of the organisation by creating a competitive advantage within the marketplace.

• Increasing the efficiency and effectiveness of the organisation's planning function by determining the size, batch quantities, and order paginations of the organisation's inventory to decrease handling, transport, and packing costs while increasing the “on time in full” (OTIF) delivery of sales orders to meet the customer's requirements.

Inventory management requires careful handling and supervision to optimise customer service levels and operational efficiency. This involves effectively managing the flow of materials into, through, and out of the organisation to minimise costs and the amount of capital tied up in inventory.

The Need for Communication

Communication is crucial in aligning inventory data with demand and sales volumes within inventory management. The primary objective is to achieve this alignment at the lowest possible cost and with the least inventory.

Effective communication is vital to the logistics function, although it can be a complex task to manage. The logistics function's efficiency and effectiveness rely on the organisation's ability to accurately determine what, when, and how to fulfil customer orders. Timely and accurate dissemination of data and explicit instructions are essential for the organisation to operate smoothly.

Communication encompasses written and oral information that must be processed accurately and concisely. The evolution and increased use of information and communications technology (ICT) have revolutionised logistics by enabling organisations to process and distribute substantial amounts of data and information. This has dramatically enhanced the ability to manage and accurately process both inbound and outbound material flows.

Enterprise Resource Planning

Information and data management are the lifeblood of logistics. The advent of enterprise resource planning systems (ERP) has enabled organisations to manage and control the flow of materials to the extent that it would be impossible to cope without an ERP system. Such a system coordinates:

• The input of sales orders.

• Consolidates the demand for inventory from the input of sales orders.

• It enables purchase orders to be raised for raw materials, parts, subassemblies, and finished goods from suppliers.

• When suppliers deliver, staff assist in receiving and accurately storing raw materials, parts, subassemblies, and finished goods.

• Authorises supplier invoices to be paid when the inventory has been booked into the organisation's inventory management system (a subpart of the ERP system).

• Assists in the planning of manufacturing.

• It enables manufacturing to convert raw materials, parts, and subassemblies into finished goods by processing material requisitions and production orders.

• It allows manufactured goods to be stored by updating production orders once the production process has been completed.

• The assembly of customer orders through the generation of pick notes.

• Confirm that the orders are ready to be dispatched by processing delivery notes.

• Authorises the creation of customer invoices when the orders have been confirmed as having been delivered by updating dispatch orders.

The series above illustrates a standard procedure for handling customer orders within an organisation. This process is intricate and depends on a continuous flow of communication and information being processed sequentially to ensure the efficient compilation and invoicing of sales orders.

Beyond this flow of communication and information lie the verbal interactions that a logistics manager engages in with the logistics team, suppliers, customers, transportation, and distribution entities, which may be strategic, tactical, or operational. Communication is the overarching process that allows logistics to function optimally and at minimal cost.

Customer Satisfaction

The organisation's requirements, target market, and financial standing will influence its structure and logistics management. The organisation must align the needs of its customer base to maximise the return on investment by providing the highest customer service at the lowest possible cost.

Nevertheless, customer demand uncertainties make logistics operations complex, involving numerous activities needed to meet the demands of an organisation's customer base. When demand patterns are unknown and unpredictable, organisations must determine whether they wish to prioritise cost or service when developing and enhancing their service offerings for customers.

Organisations can take one of two stances when it comes to deciding how they are to sell their products or services to customers:

Lean: The organisation eliminates unnecessary costs and waste in logistics and supply chain operations. By implementing lean principles, the organisation streamlines processes to enhance profitability. This approach is most effective when customers consistently demand a limited range of standard products. The organisation minimises variations in order fulfilment processes to optimise manufacturing, workforce, inventory, and time resources.

While offering customers a standard level of service, the organisation may risk losing flexibility in its logistics system by operating at maximum capacity. If demand decreases after implementing lean principles, operational costs may rise due to the underutilisation of assets. Conversely, the organisation may increase sales if demand is within capacity.

Agile: While supporting cost control is still essential, the primary focus is on the service and accuracy that an organisation provides to its customer base. Incorporating flexibility into its logistics systems ensures that all customer needs are met and exceeded when necessary. The staff operating within an agile environment must possess broader skills, knowledge, and experience as they oversee a more comprehensive range of tasks in fulfilling customer orders.

On the other hand, in a lean environment, staff members are more specialised in a narrower scope of functions. The organisation's capability to cater to diverse customer demands will inevitably result in higher costs. Nevertheless, the belief is that the growth in organisational turnover, sales, and profitability will outweigh the rise in expenses. Agile processes prioritise the customer's satisfaction and position the organisation as a leader in providing service that increases its competitive edge.

The Outsourcing of Logistics

Recently, there has been a shift towards outsourcing functions that are traditionally considered internal areas of expertise. However, due to the rising costs and advancements in logistics and ERP systems, organisations are still determining whether logistics is a core area of expertise.

Many organisations that prefer to focus on developing their product or service portfolio have increasingly chosen to outsource the management and operation of their logistics functions to third-party logistics (3PL) operators. These operators have efficient methods of operation that allow them to provide a prominent level of service while reducing costs through economies of scale. This enables organisations to minimise their logistics expenses.

Outsourcing logistics can involve various tasks such as inbound, distribution, warehousing, inventory management, sales order processing (SOP), purchase order processing (POP), or a combination of these. When logistics is fully integrated, it is referred to as 4PL, while partial integration is 3PL.

Critics of outsourcing logistics to a 3PL operator have raised doubts about the actual cost savings and highlighted the need for more control over the logistics process as to why organisations should not outsource their logistics function. In the logistics industry, larger organisations tend to manage their logistics requirements internally, while smaller to medium-sized organisations more readily opt for outsourcing as a means of cost reduction.

Supply Chain Sustainability

Transportation is crucial in logistics and contributes up to 39% of the UK's air pollution. Despite recent advancements in catalytic exhaust technology, the transition to electric-powered vehicles is expected to reduce the environmental impact of vehicle movements. However, this change will take some time to extend to larger commercial vehicles. There are some ways that the logistics function can proactively reduce its harmful impacts on the environment, such as:

• Using recyclable or biodegradable inner and outer packaging materials to reduce landfill and the toxic dumping of waste into the environment.

• Design packaging so that it does not pose a risk to wildlife once disposed of. Examples include plastic loops that get stuck around wildlife bodies.

• Decrease the amount of packaging used to dispatch goods by using enough to protect the customer's order, but not so much that the additional packaging adds little or no extra protection.

• Reduce organisational energy use, such as gas, electricity, and heating oil, by using power-efficient products and fully insulating buildings to reduce air conditioning and heating needs.

• Make the most efficient use of transport by utilising route planning software to reduce the distance travelled and maximise the load-carrying capacity of vehicles to reduce the operating hours of vehicle engines.

• Consolidating customer orders with the customer's permission will reduce the number of duplicate journeys a vehicle fleet will undertake, thus reducing the fuel used.

• The location of sorting hubs or manufacturing facilities and local distribution centres will maximise the utility of a vehicle fleet where large loads are moved over the most extended distances in a distribution network, and smaller vehicles are used for local delivery routes.

Adopting an appropriate logistics policy and strategy is crucial in helping the organisation achieve its chosen goals and objectives. Conversely, implementing the right logistics policy and strategy can help the organisation's expansion opportunities and increase profitability. When considering purchasing inventory, logistics costs can significantly impact an organisation's overall expenses, accounting for up to 60% of the total costs.

However, if inventory costs are separated as a distinct expense area, logistics costs typically range between 20% and 30% of the organisation's overall operating costs. Logistics, as a function within the organisation, is often apparent to the public, mainly when vehicles are branded with the organisation's trade name and logo.

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