Logistics is a military term that refers to the management of various activities like transportation, inventory, warehousing right from the stage of processing the raw materials by the manufacturer to convert it into finished goods till they are made available to the customer for use. While logistics management helps to optimize the flow of material within the organization, supply chain management crosses the boundaries of organization extending material flow integration upwards to suppliers and also descending down to customers. Logistics basically represents two primary product movements, (i) Physical supply, concerned with supply of raw materials, component parts, and other related supplies necessary for the manufacturing process. This comes under the purchase function (Materials Management) and (ii) Physical distribution, concerned with delivering the finished product to customers and the middlemen. This comes under the marketing management that is also called as Marketing Logistics.
From the point of view of management, marketing logistics has been described by Philip Kotler as “planning, implementing and controlling the physical flows of materials, final goods and related information from point of origin to point of consumption to meet customers requirements at a profit”. In short, it involves getting the right product in right quantity to the right customer in the right place at the right time. Traditional physical distribution typically started with products at the plant and then tried to find low-cost solutions to get them to customers. However, today’s marketers prefer marketing logistics, which starts with the marketplace and works backward to the factory.
Marketing logistics is the process of delivering the finished goods to the intermediaries as well as customers. An efficient delivery system helps to reduce the costs, improve customer service, and minimize time that finally helps to gain customer loyalty. A physical distribution system involves various tasks (as given in the table below) that interact with each other and play an important role in the overall performance of the logistics system.
| Tasks | Key Aspects | |
| 1. | Transportation | An important activity that involves movement of goods from the manufacturer to the customer. |
| 2. | Warehousing | A place where goods are stored till they are made available in the market place when needed. |
| 3. | Inventory Management | Ensures that right mix of products are available at right place/time in sufficient quantity. |
| 4. | Packaging | Protects the products, maximizes use of warehouse space, maintains product identity. |
| 5. | Materials Handling | Maximizes speed, minimizes cost of order-picking, moving to and from storage, loading and unloading operations. |
| 6. | Order Processing | Communicates requirements to appropriate locations through inventory management. Starts the physical distribution process. |
| 7. | Production Planning | Goods are made available for inventory. Planning of warehouse facility utilization, transportation requirement |
| 8. | Customer Service | Establishes customer service levels with marketing objectives as well as cost limitations |
| 9. | Plant Location | Facilities planning (factory and warehouse location) to ensure capacity & reduce transportation costs |
A particular logistics activity cannot be performed without evaluating its impact on other areas. For instance, the objective of maximized customer service may develop into a conflict with the objective of minimized distribution cost. Hence, total cost approach has to be considered to manage such inconsistency.
The total cost approach focuses to balance two essential variables: (i) total distribution costs, and (ii) the level of logistical service provided to the customers. The total cost approach is designed in such a way that it tries to achieve a combination of cost and service levels that maximizes the profits to the company and the channel members.
- In this approach, the total cost of distribution is considered instead of the individual cost of the elements of physical distribution as the decision made for one logistical variable affects all or some of the other logistics variables. For example, if inventory is reduced below the required quantity in order to reduce inventory costs, it may result in stockouts and increase in order backlogs. This may necessitate extra productions to provide the stockout items and air-freight them at high cost to customers whose production stopped due to non-delivery of products. All this would finally lead to reduction in future orders from the unsatisfied customers due to poor delivery performance. Thus, to save a small individual cost, the total cost substantially increased. The interactions among logistics activities (i.e. transportation, inventory, warehousing) involves a cost trade off as these cost elements are sometimes in economic conflict with one another. Thus, manager must be willing to trade-off a cost increase in one activity for a larger cost decrease in another activity that should finally result in reduced total logistics costs.
- Service aspect is the other half of the total cost approach. It is to be understood that all customers or products do not require same level of service. Each element of service has different levels of importance that the industrial marketer should recognize. The cost involved in providing the level of service must be evaluated in light of the revenue generated. Once the important elements of customer service are determined by the industrial marketer, he should set goals of customer service levels for each service element, compare the actual with goals and finally take corrective actions to minimize the difference.
Importance of Marketing Logistics
The effective logistics management can provide a major source of competitive advantage. The source of competitive advantage is found firstly in the ability of the organization to differentiate itself in the eyes of the customer from its competitor and secondly by operating at a lower cost and hence at greater profit. There are two bases of success in any competitive context. One is the cost advantage and second is the value advantage. Cost advantage is achieved through greater productivity and value advantage is pursued through a different plus over competitive offerings.
It is now recognized that marketing logistics is a critical area of overall supply chain management. Logistics expenditure accounts for 15-20% of GDP. Thus, by improving the efficiency, logistics makes an important contribution in reducing costs as a whole. Business logistical techniques can be applied to marketing logistics so that costs and customer satisfaction are optimized. There is little point in making large savings in the cost of distribution if in the long run, sales are lost because of customer dissatisfaction. Similarly, it does not make economic sense to provide a level of service that is not required by the customer but leads to an erosion of profits. This cost-service balance is a basic dilemma that physical distribution managers face.
The reason for the growing importance of marketing logistics is the increasingly demanding nature of the business environment. In the past it was not uncommon for companies to hold large inventories of raw materials and components. Although industries and individual firms differ widely in their stockholding policies, nowadays, stock levels are kept to a minimum wherever possible. Holding stock is wasting working capital for it is not earning money for the company. To think of the logistical process merely in terms of transportation is much too narrow a view. Physical distribution management (marketing logistics) is concerned with the flow of goods from the receipt of an order until the goods are delivered to the customer. In addition to transportation, marketing logistics involves close liaison with production planning, purchasing, order processing, material control and warehousing. All these areas must be managed so that they interact efficiently with each other to provide the level of service that the customer demands and at a cost that the company can afford.
With rising interest rates and increasing energy cost, logistics received more attention as a major cost driver. Logistics cost became a more critical issue for many organizations because of globalization of industry. This has affected logistics in two primary ways. First, the growth of world-class competitors from other nations has caused organizations to look for new ways to differentiate their organizations and product offerings. Second, as organizations increasingly buy and sell offshore, the supply chain between the organizations becomes longer, more costly and more complex. Excellent logistics management is needed to fully leverage global opportunities. Information technology input has given a next boom to logistics management. This gave organization the ability to better monitor transaction intensive activities such as ordering movement and storage of goods and materials. Combine with the availability of computerized quantitative models; this information increased the ability to manage flows and to optimize inventory levels and movement.
Other factor contributing to the growing interest in logistics include advances in information technology, increased emphasis on customer service, growing reorganization of the system approach and total cost concept. The profit leverage from logistics and realization that logistics can be used as a strategic weapon in competing the market place.