1. UNIT 1 INTRODUCTION TO MARKETING
LOGISTICS/ SYSTEM
Structure
1.0 Objectives
1.1 Introduction
1.2 ConceptofMarketing Logistics
1.3 Objectivesof Marketing Logistics
1.4 ImportanceofMarketingLogistics
1.5 LogisticsTasks
1.6 Logisticsand Marketing
1.6.1 Marketing and Logistics Converge
1.6.2. The Customer Dimension
1.7 Domesticand InternationalLogistics
1.8 RecentDevelopnlentsin InternationalLogistics
1.9 ~ o l k o f
~nfonnatiolz
Technology ,
1.9.1 Features of the Information System
1.9.2 System Design
1.9.3 Current Information Technology Applications in Distribution
1.10 Let Us SumUp
1.11 Keywords
1.12 Answersto CheckYourProgress
1.13 TenllinalQuestions
1.0 OBJECTIVES
After studyingthis unit, you shouldbe ableto:
e explainthe concept, objectivesand importanceof marketing logistics
0 describevarious tasks involved in marketinglogistics
explainthat distribution,marketingandmanufacturingneed anintegratedapproachsoas
,todevelop a competitiveadvantage +
0 explainthe factorsthat make internationallogisticsdifferentfromdomesticlogistics
describethe recentdevelopmentsin internationallogisticsaffectingthesupplyand
demand for more efficientlogistic services
identifythe need areas of logisticsinformationand explaintherole ofinformation
technology in respect thereof.
v .
1 . INTRODUCTION
Management of deliveryof goodsto thebuyer is asimportantanelementas anyother activityin
marketing. Thisis moretrue of internationalbusinesswhere competitionisfierceand suppliers
fromvarious sourcesare readily available. Quiteoften, the most crucialpartin export tradeis
the timely deliveryof goods at a reasonablecostbythe exportertothe importer. In fact, the
prospectivebuyer may be willingto pay evenhigherpricefor timelysupplies. But, the
emergenceoflogisticsasan integrativeactivity, with themovement ofraw materialsfromtheir
2. Tnternntional sourcesof supplytothe productionline and endingwith the movement of finished goods to the
Mnhkcting Logistics
System
customer, hasbeen a devcloprnent of the lastcoupleof decades. Earlier on, all tlie functions
comprisinglogisticswere not viewed ascomponentsof a singlesystem.But, with emergeliceof
logisticsasan importantpart of corporatestrategyduetothe certain developmentsin the field
ofinternationaltradehas gainedspecialsignificance. Inthisunit, youwill learn abouttlie
conceptof logistics,itsobjectives,importance, tasks, and the developments in international
logistics.
1.2 CONCEPT OF MARKETING LOGISTICS
Theword 'logistics' is derivativeof a Frenchword 'loger' which meansthe art of transport, .
supplyand quartering of troops. Essentiallya military concept,it is now commonlyappliedto
marketingmanagement. Fightinga war requiresthesettingof anobjective, and to achievethis
objectivemeticulousplanning is needed sothat the troopsare properly deployed and the supply
lineconsisting,interalia,weaponary,food, medicalassistance,etc.ismaintained. Similarly,the
plan shouldbe suchthat thereisa minimumlossofmenand material while, atthe sametime, it
iscapableofbeing altered if the need arises. As in the caseof fightinga war in thebattle-field,
themarketingmanagersalsoneed a suitablelogisticsplan that iscapableof satisfjing the
companyobjectiveof meeting profitablythe demand of the targeted customers. .
From thepoint ofview of management, marketinglogisticsorphysical distribution hasbeen
describedas 'planning,imple~ilenting
and controllingtheprocess ofphysicalflowsof materials
and finalproductsfrom thepoint of origin to thepoint ofuse in order to meet customer's needs
at a profit. Asa concept,itmeansthe artof managingtheflowof raw materials and finished
goodsfrom thesourceof supplyto their users. In other words, primarily it involveseacient
managelllentoffinished goodsfromthe end ofproduct lineto the consumersand, in some
cases, includethe movement of raw materialsfro111the sourceofsupplyto theb6ginning ofthe
productionline. Theseactivitiesincludetransportationwarehousing, inventorycontrol, order
processingand informationmonitoring. Theseactivitiesareconsideredprimary to the effective
management oflogisticsbecausethey either contributemost to the total cost of logistics or they
are essentialto effectiveco~npletion
ofthe logisticstask. However,the firms must carry out
theseactivitiesas essentialpart ofprovidingcustomerwith the goodsand services they desire.
1.3 OBJECTIVES OF MARKETING LOGISTlCS
Thebasic objectiveof an ideal logistics system is to ensurethe flow of supply to the buyer:
i) incorrectquantity,
ii) atdesiredlocation,
iii) atrequiredtime,
iv) inusable condition,and
* v) atthe lowestcost
Thisimpliestliata6miwill aim at havinga logisticssystemwliichmaximisesthe custolner
setviceand minimisesthe distribution cost. However, onecan approximatetlie realityby
definingthe objectiveof logisticssystemas acliievinga desired level of customer service i.e.,
the degreeof deliverysupport givenby the sellerto thebuyer. This comprisessuch elementsas
(a)speed of deliveringnonnal orders, (b)speedof meetingemergencyor non-anticipated order,
(c)careinpackingand handlingdistribution,(d) degreeand speedof replacing defective
goods, and (e)pmvisionfor salesservicesand maintenanceof inventoty, Thus, logistics
managementstartswithascertainingcustomerneed till itsfulfillmentthrough product supplies
and, during thisproccss of supplies,it considersall aspectsof performance which include
arrangingtheinputs, manufacturirlfithe goodsand thephysical distributionoftheproducts.
However, there are some specificobjectives tobe achievedthrough a proper logisticssysten~.
These canbe described as follows :
Improving customer service :As you know, the marketing coilceptassumesthat the sureway IntmducUon to
to~naximise
profits inthe long run isthrough ~naxirnizing
the customer satisfaction. As such, an Marketing Logistlcs
System
importantobjectiveofall marketing efforts, includingthephysicaldistributionactivities,isto
improvethe custonler service.
An eff~cie~~t
management of pllysical distribution canhelp in improvingthe level of customer
serviceby developingan effective system of warehousing,quick and economictransportation,
and maintaining optimunilevel of inventory. But, asdiscussed earlier,the level of service
directly affects the cost of physical distribution. Therefore, while deciding the level of service, a
careful analysisof the customers' wants and the policiesof the conlpetitors is necessary. The
customersmaybe inlerested in severalthings like timelydelivery,careful handling of
merchandise,reliabilityof inventory, economyin operations,and so on. However,the relative
ilnportanceof these factors in the minds of customersmayvary. Hence, an effortshouldbe
nlade to ascertainwhether they value ti~ilely
deliveryor economyin transportation,and so on.
Once the relativeweigllts are known, an analysis of what the conlpetitorsarcofferinginthis
regard sllould also be made. This, together with an estimateabout the cost of providinga
particular level of customer service, would help in decidingthe level of custonler service.
Reduce total distribution costs :Another most conunonlystated objectiveis to minimizethe
cost of physical distribution of the products. As explained earlier,the co%tof physical
distributionconsistsofvarious elements suchastransportation, warellousingand inventory
maintenance,and anyreductioi~
in the costof one elementsmayresult in an increasein thecost
ofthe other elements. Tll~is,
tlie objectiveof the fir111shouldbe to reduce tlletotal cost of
distributionand notjust the cost incurred on ally oneelement. For thispurpose, the total cost of
alternativedistribution systems shouldbe analysedand tlie onewhich has themininiumtotal
distributioncost should be selected. (You nlay refer to Unit 2 where different approachesinthis
regard havebeen duly esplained.)
Generating additional sales :Another in~portant
objectiveoftlle pllysical distributionsystem
in a firm is to generateadditional sales. A firm can attract additionalcustomersby offering
betterservicesat lower prices. For example,by decentralizing its warehousingoperationsorby
using ecoiiolnicand efficient modes of transportation, afirm can achievelargermarket share.
Also by avoidingthe out-of-stock siluation, the lossof loyal customerscanbe arrested.
Creating time and lllnce utilities :Tlle physical distribution systenlalsoainlsat creatingtime
and place utilities in the products. Uilless the products arephysically moved from theplace of
their origin totlie place where they are required for consumption,they do not serveanypurpose
tothe users. Similarly,the products have to be niadeavailableatthe timethey are needed for
consumnption: Both these purposes can be achieved by increasingthenumber of warehouses
locatedat places from tvliere the goodscanbe deliveredquickly and wheresacient stocksare
maintained so as to meet tlie emergency demalids of the custom~ts.Moreover, a quickermode
oftransport shouldbe selectedto movethe productsfrom oneplaceto another inthe shortest
possibletime. Thus, time and placeutilities canbe creald intheproductsthrough an etficient
/ systemof physical distribution.
I Price stlbilisrtioo:Pllysical distribution may alsoaimat achievingstabilizationintheprices
of the products. It canbe achieved by regulating theflow of the productstothe market through
ajudicioususe of available transport facilities and compatiblewarehouseoperations. For
example, in tlie caseof industries such ascottontextile, there are heavyfluctuationsinthe
supplyof raw niaterials. I n such casesif the market forcesare allowedto operatefreely,the raw
materialwould bevery cheap during harvesting season and very dearduril~g
off season. By
stockingthe raw material during the periodof excess supply(harvestseason)and made
availableduring the periods of s b r tsupply,the prices canbe dulystabilized.
1.4 IMPORTANCE OF MARKETING LOGISTICS
The importanceof a logistics systemlies in tlie factthat it leadsto ultimateconsunmationofthe
salescontract. Thebuyer is not interested inthe promixs of the sellerthat he can supply goods
at competitiveprice but tliat he actually doesso. Delivery accordingto the contractis essential
t o
i fulfilling the co~nmercial
and legal requirements. Inthe event of failureto comply with the
7
3. Internntiornal
Marketing Logistics
System
stipulatedsupplyperiod, the seller may not onlyget his sale amount back, but may also be
legallypenalised, if the salescontractsospecifies. There is no doubt that better delivev
scheduleisa goodpromotional strategywhen buyersare reluctant to invest in warellousing
keepingliigherlevel of inventories. Similarly,better andlor timelydeliveq helps in getting
repeat orders through creationofgoodwillfor the supplier. Thus, as effectivelogistics systeb
contributesimmenselyto tlieachievementsof the marketingobjectivesof a firm. It creates
tirneandplaceutilitiesin the productsand therebyhelps inmaximising thevalue satisfactionto
consumers. Byensuringquick deliveriesin mininiurntime and cost, it relieves the customers
holdingexcessinventories. It also bringsdown the costof carzyinginventory, material
handling,transportationand otherrelatedactivitiesofdistribution. In nutshell, an efficient
systemofphysicaldistributionhas agreat potential for improving custonler service and
reducingcosts.
The ready accepfanceof the dynamics of marketing logisticshas been due to a number of
factors,including:
i) Technologicaladvancementinthe fieldsofinformation processing andconlhunicdtion:
ii) Technologicaldevelopnlentin transportationandmaterial handling; and
iii) Changein theattitudetowardsthe total costapproacllrather thm direct cost approacll.
As a result of thesedevelopments, the decisionniaker has a number of choices to work out the
most idealmarketinglogisticssystcrn. Essentially,this systemimpliesthat people at alllevels
of managementLink and actin terms of integratedcapabilitiesand adoption of atotal approach
to achievcpre-determined logisticsobjectives.
Lagisticsisalso important on the global scale. Eficient logistics systemthrougl~out
the world
eco'nomyare abasis for trade and a high standard of living forall of us. Lands, as well as the
people whooccupythem, arenot equallyproductive. That is, oneregion often has an
advantageoverall othersin someproduction speciality, An &cient logistics systemallowsa
geographicalregion toexploit its inherent advantage by specializing itsproductive efforts in
thoseproducts in whichit has an advantageand by exportingthese products to other regions,
The systemallowsthe products' landed cost (productionplus logistics cost) and quality to be
competitivewith thosefrom any other region. Commonexamplesof this specialization have
been Japan's electronicsindustry,the agricultural, computerand aircraftsindustries ofUnited
-
satesand variouscountriesdominaqcein supplyingraw materialssuch as oil, gold, bauxite,
andclwomium.
Theother reasonswhylogisticshas gainedimportance intlie international tradecan be
summarizedas.follows:
1 Many companiesare restructuringtheirp r o d u c t i s onaglobalbasis. Some
manufacturersarecentralizing productibnto gain economiesofscale.
2 Productlines areproliferating. More and moreproduct linevariety is needed to satis@
the growingrangeof customertastesand requirements,and stock levelsinboth field and
factoryinevitablyrise.
Check Your Progress A
1 Definemarketing logistics.
2 List the main objectives of marketing logistics.
I 4 Statewhether the following statementsare True orFalse.
i) ECcient customer service isthe only objectiveof nlarketing logistics.
ii) Effective logistics system can bring stability inprices.
Thebalanceof power in distributionchain isshiRingfrom Ule manufacturers to the '
trader.
3 Why doyou consider rnarketillg logistics an important activity?
Product lifecyclesare contracting. Companiesthat have gone all'out to slash costsby
I
turningto largescalebatch production regularly, find themselvessaddled with obsolete
,
stocksand areunableto keeppacewith competitors' nkw-product introductions.
1
In manyil~dustries,
thevalue addedbymanufacturingis declining asthe cost of i
materialsanddistributionclimbs. 1
Theadvantageof low-cost, highvolume dataprocessingand transmission is
revolutionizinglogisticscontrolsystems. Becauseof newtechnologies, managers can
nowupdate salesand inventowplanning fasterand morefrequently,andfactories can
respond withmoreflexibilitylovolatilemaiket conditions.
iii) Marketing logistics createplaceand time utilities.
iv) Marketing logistics does not include activitieslike order processingand
" infonrsationmonitoring.
v . The emergence of logistics asan integrative activity isof recentorigin.
vi) Logistics system does not allow theproducts' Ia~ded
cost and quality to be
competitive with those from anyother region.
1.5 LOGISTICS TASKS
The inlportatlt decisions in respect of physical distribution are :(1) how orders sllouldbe
handled? (2) whcre sllauld the tvarehousebe located? (3) how much stocksl~ould
bekept on
hand? and (4) how should the goods be transported'? and (5) how isthe logisticsinforlnation
monitored? In bct. as shown in Figure 1,1, these aspects constitutethe major componentsof
thephysical distribution system.
Introduction to
Marketing Lugisfic~
System
4. International
M ~ r k e t i ~ ~ g
Loglstlcs
Systena
Figure 1.1. Ma.jor Tasksof Physical DistPibution System
r - 7
Let us discussabout the componentsin detail.
OrderProcessing:Thestarlingpoint of the pllysicaldistribution activitiesis theprocessingof
customers' orders. In orderto providequicker customer service, the orders received from
customerssliouldbe processed within the leastpossible time. Order processing includes
receivingthe order,recordingthe order,fillingtheorder,and assembling allsuch ordersfor
tralisporfation; etc. The company and the custon~ers
benefit when these stepsarecarriedout
quickly and accurately. Tlleenror conl~nitted
atthis stageat times can prove to bevery costly.
For examnple,if a wrongproduct or thesamcproductwit11different specificationsis suppliedto
the customer, it maylead to callcellationof the original order (apart from loss in thecredibiliw
ofthefirm). Similarly,if the o r c r isrot executedwithin a reasonabletime, it mayleadto
serious consequences. High specd dataprocessingtechniquesare now available which allow
for rapid processing ofthe orders.
Warehousing:Warehousingrefers to the act of storingand assorting pr~ducts
in orderto
createtimeutility. Thebasic purpose ofthe warehousingactivityis to arrange placanent of
goods,provide storagefacilityto store Ulem consolidatethemwith other similar products,
divide them intosmallerquantitiesandbuild upassortmentofproducts. Someof tlle imponant
decisionareasin respect ofwarehou!jing are:
1 howmanywarehousesslioultl#e firmhave? .
2 where shouldthese warehouses be located?
3 what should bethe pattern of ownership ofthe warehouse (owned or rented)?
Generally,larger number ofwarehouses a firm has thelesser wouldbe the time taken in
serving customersat different l~ca~tions,
but greaterwouldbe the cost of warehousing,
Thus, thefirmhas to strikea balancebetweenthe cost ofwarehousing and die
of
customer service.
Inventory Control :Linked to warehousing decisionsarethe inventorydecisions which hold
thc key tosuccessofphysical distributionespeciallywhere the inventory costs may be as high
as 30-40per cent (e.g., steeland automobiles). No wonder, therefore,thht tlle new concept of
Just-in-Time-Inventolydecisionisincreasinglybecomingpopular with a number ofcompanies.
Thedecisionregarding level ofinventoryinvolvesestimationof demandfor the product.
A correct estimateof the demandhelps tohold properinventory leveland control tie inventory
costs. Thisnot onlyhelps thefirm in term ofthe cost ofinventoryand supply to custonlersin
timebut alsoto maintain productionat a consistentlevel. The majorfactorsdetemlinisg the
inventory levelsare:
1 Thefirm's policyregardingthe customerservicelevel
2 Degree of accuracy.of the sales forecasts
Tmns~,ortrtioa
:Transportation seeks to move goods from points ofproductioll i11.d salc to
points of consumnptionin the quantit~cs
required attimes needed and at a reasonable cost. The
transportJ o n systeil addstime a dplace utilitiesto thc goods landlcd and, tl~us,
increases
their economicvalue. To achieve these goals, trdnsporiation facilities nlustbe adequate.
regular, dependableand equitable in ternls of costs andbenefits of the facilitiesand service
provided.
hfornlation Monitoring : Tlleplqsical distributionmanagers colltinuouslyneed up-to-date
informationabout inventoly, transporlation and warellousing For example,in respect on
inventow, infornwtioo abont present stockpositionat eachlocation, futme conlmi~n~ent
and
replel~isiulle~~t
capabilities areconstantly ieguired. Similarly,berorechoosing acilnicr,
informationaboutthe availability of viirious modes of transport, their costs, services and
suitabilityfor a particular product is needed. About warellousiag, i~lforeation
with respect to
spaceutilization, work schedules.unit loadperforn~ance,
etc,,is required.
In order to receive all the illfornmtior~
stated above. an eeicie~rt
ms~gement
i~~lorn~alion
rystenl would be of illlmense use in controlling costs, inlproving swiccs and deternlining the
ov&alleffectiveness of distribution, Of conrse, it is diflic~~lt
to corrcctly assess tllc cost of
physical dirtriblltion o?erntioos. But if correct inforlllation is avililubleit can be analysed
systenlaticdllyand a great deal orsi~viog
canbe ensured.
1.6 LOGISTICS AND MARKETING
Tradit~onally,
physical distribolion is consideredas "The Other Hillof MKTG". Marketing
hasprimarilytwo purpOSCS:
a) Obtainingdemand,and
b) Servicingdemand.
These two are linked by the level of customer service provided.
Obtainingdelllalld is the result olprolootiorlal cfforlr ormrrkcting aswe11
price i111dproduct
rilis offered to consumers. Once tlle dem;lndhas becn secured, it mustbc served. This is wllere
.physical distributionco111es in. Tileplysical distribution effortsputlle right pmduct in tl~c
right placeat theright tinle to meet de~nand
requirements Salespcoplcllave long recog~lized
that pllysical distributionactually contributesto creating dsnwnd,pmdllct availability,prompt
delivcrv. and accurateorder fillilig arejust a few of the services that canplease a custonler and
.,
additional sales can be generated by good serviced
~raditidnall~,
distribution hasbeen viewed by nlany asa sourceof heavy costs, admittedly a
necessaq cost inevitably,sucha viekvpoil~t
leads to a search forimprovenlent in operating
I efficiencyand a focus on cost redaction. in fact,logistics costs accountfor a large proponion
of the salesvalue of tnany prodvcts. In a comrpetitivemarkct, particularly where substitutes are
availableand acceptableto the custonler, a major advantage canbe gained if logistic costs can
be rednced withoutjeopardising the required servicelevels,
1
.
6
.
1 Marketing and Logistics Converge
Marketing expertsllavcrecognized that for developing a position of sllnainable coillpctitive
advantage, a major source is superior logisticsperfor~~wncc.
Tlikls, it canbe argued that irlslwd
ofviewingdistributio~l,
marketing and manuficturing as largelyseparate activitieswitldn tho
,
business,they need to be unified, panicularly atthe strategic levcl. One n~igl~t
be tenlyled to
i describesuch an integrated approach to strategyand planning as 'Marketi~~g
Logistics'.
Businesscan only conlpete and surviveeither by winning a costadvantageor by providing
superiorvalue slidbenefit to the customer.
Responsiveness the distributionsystemi.e., abilityof the gvste.to
inveIltolv
needs tothe factory and gettheproductsin themarket Increasingly,the power of thebrand is diminishing as te~hll~lo!Zies
of compctillg product
converge, nlaking product di@erencesless apparellt. Faced wit11sac11situations, "le custO1ner
The cost Of inventoq
consists ofholdingcost (such as costofwarehousing, tied up capital be iduenced by price or ilnage perceptions,but ~~~r-riidillg
these aspects
and replenishnent Cost(includingthemanufacturing cost^+ of productin stockmay become the mhor consideration. A ~ ~ c o n d
change is''Iat Ihc
5. IitternntlonaI customer' expectationsof servicehave increased. Tlle customeris now nlorc demanding and
Marketing Loglstlcr
more sophisticated. Industrialbuyersaremore professional in their approach. Increasinguse 2 Statethe important decision areas in respect ofwarehousing.
Systen~ ,
ismade offorrtlal vendor appraisal systemsandsuppliersare now confronted with the need to
....................................................................................................
providejust-in-time deliverypcrfornlance.
Anotherchangethat has had severeimpact in niany industries is the trend for product life
cyclesto beconie shorter. Rapid developinentsin technologywhich have created markets
where none existed and have rendered thelnselvesobsoleteas the next generation of product is
announced. Suchshorte~liiig
life cyclescreate substantialproblelrlsfor logistics inanagerncnt.
In particular, sliorterlifecycles demand shorter lead times. Lead time is traditionally defined
as the elapsedperiod froill receipt of customerorder to the actual delivery. In today's
environmenttliere is a secondaspectto lead-timei.e., how longdoes it take fromprocurement
ofraw materials,sub-asscmblies,etc. to the deliveryof the final product ofthe customer?
What we are now witnessing is a sitnationwhere the productlife cycle, in some cases, is in
danger ofbeconung shortertlianthe procurement-to-dcliverylead time with all the consequent
problenlsforplanning and operationsthat sucha situationwill create.
I
A furthertrend is that the production lead times are sliorte~ling
through the use of new
technology. Thismeans that a greaterproportion of the totalprocurement to-delivery leadtime
isaccounted for by transport and storage. Thus we see greaterpressure for integrated
distribution/logisticsmanagement.
1
.
6
.
2 The Customer Service Dimension
Tlie abovechangesin Be environmenthave moved logisticsto center stageand, in turn,
focussesthe spotlighton customer service. Customerserviceis die thread that linksthe
logistics and marketingprocessesbecausethe end-productof the logistics system is customer
service. The skill lies in inanagingtlie twin annsofmarketingand logistics in sucha way as to -
maximisetlievalue addedthrough custoiner servicewliile seeking a cost advantage.
1.
The role ofcustoinerserviceis to provide time and placeutilities in the transfer of goodsand
servicesbetween buycr and seller. There isno value in a product or service until it is in the
hands of customeror consumer. It followsthat makingthe product or serviceavailable is what,
in essence,the distributionfunction of the businessis all about. However, 'Availability' is in
itself a complex concept wliich is influencedby.a galaxyof factors. Tl~ese
factors, for
example, includedeliveryfrequency,reliability, stock levels and order cycle time. Ultimately,
customer service is determinedby the interactionof all those factors that nffect the process of
making productsand servicesavailabletothebuyer.
Now-a-days, customerservicehas changedits dimensionsto quick and easy availability of
products with reduced inventory costs. Customershave started analysing cost of the product
with lead time of suppliersand the inventory costthereof. As such, lowvolume purchase, but
with largerfrequency, is incrcasing. A customermay ultimately buy a large quantitybut at
different iiitervalsof time. Suchserviceis only possiblethrough a good network of
warehousingand appropriatelogisticsmanagement Infact, today logistics malwgerncnt not
only ensuresthe supplyofproduct at lowest costbut also actsas a marketing tool for increased
sales.
Inlruduction to
Marketing Logisti-
System
...................................................................................................................................
3 Why doyou coilsider physical distribution as 'the olller half marketing'.
4 Fillin the blanks.
i) The starting point ofthe physical distributionactivitiesisthe processing
..................
of.
.....................
ii) Tilenew concept of Just-in-time.. is increasinglybecoming
~ o ~ u l a r
with nlanv firnls.
A A
.....................
iii) Logistics costs account for a of the salesvalue.
....................
iv) of product life cyclescreate substantialproblems.
....................
v) Now a days.. servicehaschanged itsdimensions.
1.7 DOMESTIC AND INTER NATIONAL LOGISTICS
Differencebetween donlestic aid international logisticscanbe saidto arisemainlyon account
of threemajor factors: (i) logistics cost is likely to accountfor amuch higherproportionof the
deliveredcost oftile product ininternational trade, (ii) the mechanics of doingbusinessare
nluchmore complex inthe contextofintemational (than domestic) logistics, and (iii)the
political, cultural and institutional factors connected with intemationallogisticsareof
considerableiinportance whereas these are u s d Ynot of much consequencein the contextof
donlesticlogistics. Further, agenerally more proactivethan reactiveapproachisneededforth
managementofinternationaltradelogistics.
Logistics cost :Let us consider the cost zspect of international logistics. First it isuseful to
concentrateon the transport cost. Since, in quantitative terms. morethan 90% ofinternationally
traded cargoes still move by sea, we may look at sea freight. Acwrding to data publishedby
UNCTAD, the sea freight borne by developillg countries in 1988as a proportion of the c.i.f. cost
of imports was 8.89% as compared to only 4.40% for developed countries. Thus. developing
countriesbear aburden twice as high as that borne by developedcountriesinterms oftransport
cost. In fact, studies show transport cost to be amuch more formidablean obstaclefacedby
, developing countries thanthe tariffs. ~ u t ,
the percentages mentioned above areaveragedfor all
goods and all distances and collceala wid= rallge, Seafreight canbe as low as 1%or less (of
the fmal product cost) in the case ofpharnlaceuticds and as high as 80%inthe caseofrough
granitestones. In general itvaries inversely with the level ofprocessing (orvalue addition)
embodiedin theproduct. Butto seafreighthave tobe addedthe inland transpoficostsat either
end and, more important, U~eevarious
other logistic costs. Then, oftenunder estimated.arethe
: Check YourProgressB
1 List the major tasks of marketinglogistics.
..............................................................
.....................................................................
..............................................................
.....................................................................
.................................................
....................................1.......#...................................
................................................................. ................................................................
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
I
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.................................................
6. P ~ ~ t c ~ ~ ~ a t i o ~ l u l
Illrrkeil~lgLogistics
System
costsassociatedwith inventory, At currentinterestratesthe annual cost of holding inventories
canrun ashigh as30%of its value. Similarly,least obvious, and often ignored, are the staff
' and computer costsofrunningthe logistics system(alsocallednon-physicalhandling costs)
includingthe costofforecastingdemand,planningfactoryloading,processing and dispatching
orders, culnbersomedocumentationrequiremehts, seekingvarious permissions, etc.
Mechanics :The second differenceis in the meciianics. ~ o i n ~
business with a foreign
counterpartfor thefirsttime canbe a dauntingexperience. For one thing it requires aslot of
experienceand expertiseto be able to quoteon a 'delivered' basis without a thorough
.kilowledgeof theproceduresand regulationsin operationinthe concerned country.
Furtl~er,
inovementsbetweencountries areaccompaniedby many more documentsthan in the
case of domesticshipments. A study showedthat in Indiaan exportconsignment required 48 ,
hours of typing tofillout forms,327 signatureswere needed from the authorities and that the
whole process took on averagesix weeks to complete. Add to this the delays occurring after
thecoil~pletion
oftheseforlhalitiesatthe inland cargoaggregationpoints, attheport, etc. It
wasestinlatedthat foratypical intermodalshipmentfrom ChicagotoMunich, thetotal time
required was 21daysof which tl~e
'productive' time, viz., time spentactually in transit, was less
than 40 %. Where developingcountries areinvolved at either end (orboth ends).ofan
intertlsltionaItradetransaction, suchdelaysat 'switching' pointscan accountforan even greater
proportionof totaltransit tirne, thus addingto the logisticscosts. This explainsthrtt, for the
businessesof developingcountries engagedin internationaltrade, the logistics cost canbe an
importantfactor intheircompetitivenessandprofitability.
Political and cultural environment : The final groupoffactors is political and cultural
ewiroimlent. Where,in order to retain controloverthedistribution, an exporter quotes on
'delivered' basis he has to coverhiniself for a lotofuncertaintyat the other end ofthe ,
transaction,e.g., the eextkntofgoverni~ient
control onforeignexchangetransactions and onthe
ba~dcing
system,thelegal recourse availablein caseof damageor fraud, the roductivity/
efficiencyof labour andcapital inthe otller country, etc. Even insurance cover is seldom
adequateto covergeiaine lossesin casesof mishapto cargo. All these factors can be lumped
'togetherin a categoryof 'unknowns' whichnecessarilycomeinto play in a transaction of
intemaliol~al
logistics.
b
1.8 RECENT DEVELOPMENTS IN INTERNATIONAL
LOGISTICS
Vqrious dcveloplnentsininternational logisticseectingboth 'supply' and "dernand' sides have
spurred theemergenceof logisticsas perhapsthemost importantplank of corporate strategy in
the developed countries. The supplyof logisticservicescan be seen in terms of a series of
tecllnologyrelated, economicandpolitical factors. Inbroad termsthese canbe summed up as
(a) deregulationof transport services, (b) oversupplyand fiercecompetition at a time of
recession leadingto abattleforsurvivalin the transport industrymost noticeablyin world
sllipping, (c) amendments tolegislationlstatutorycontrolencouraginggreaterprivatization in
the transportfield,and (d) the introductionof faster, biggerand more efficientcontainer ships.
Oneoft110cnlcial facilitatiiigdevelopinentsin thefieldof international trade logistics on the
supplysidehas been the elnergenceandtherise of 'containerization', Over 90% of the general
cargo trafic 011some major world sea routes movesby container in specialized 'cellular
vessels' constructedtooptimizecoiltaillerloading space. Speedand efficiencyof all links in
the total transportchainare increased by illovementof goodsin containers. This reduces the
nunlber of llandlings(reducingthel~ndling
costaswell as 'unproductive' time in transit), the
packagiirgreq~rircd,
thepossibility of damageto cargoandpilferage and, consequently, the cost
of ii~surui~ce.
Becauseof successfulinternationaleffortsto reduce the 'barriers' w s e d by
regulatory illspectioilsand otherproceduralrequirements)to containermovenlent, contaiilers
havebeell ilbletopenetratefarthorandfartherinto theinland distribution system,thus helping
to realizetlleadvailtagesof international llillterrnadaltransport.
On the 'dellland' (viz., trade) side,the variousforceswereatworkhavebeen :(a) unemployment
recessioil and rising interest ratesforced industryinthe developed countries to seek new ways
I
!
it0 add value, (b) the fierce competition fro111Japa11i~sd
Vie Far East forcedEuropean
fmanufacturersto resortto new produclion mcthods illvolvil~~g
global-dispersalofmanufscturing
'and 'outsourcing' of componeilts,(c) increased trade in intcnnediales consequent on third
countrynlanufactllring(d)sllorterproduct developrrlellttime and smaller shipmellt size, and
finally(e)increasedproduct differentiationand trildediveasificalion.
Thesefaktorsgoverning the demand for, and supplyof, expanded logistics servicescreated new
opportunitiesfor carriers (especiallydeep sea) who cspaaded their activities horimntally
(landwards)integrating with rail and road nlodcs in orderto ofler 'value added' services totheir
customers. Thenewlyfound emphasison 'just-in-time' or 'zero' inventoly based manufacturine
implied a great deal of effectivecontroloil the logisticclelnent. Colnpetilion wit11Japan meant
fortheAmerican and European manufact~lrers
ail cqual abilitytomanage their logisticsmore
cost effectively(e.g,by trading oEhigher transpod costs against savings B inveotory cost).
Whatresultedfrom all this, in short,was notllil~g
less than the integration of the transport
functionwithproduction.
Let us now sun1nlarisethe inail1trends which are likely to hold tlle fieldin international logistics
inthenearfuture.
First, fllereisa pro~~ounced
awareness of the iinportilllccof logisticsas a stralegicissue in
gainingthe competitiveedge. Pressures fro111the ilisrkctplace have led to new i m p o ~ n c e
beillg
attachedto timeliness, conlpleteness,frequency and relinbiliQ of service;. Indeed these are the
most prized dimensions of customer servicewhicl~,
in rn1.n. hold the key to conlpetitive
advantage.
Second,greater integration of 'inbound' logisticswit11pllysical distribution hasbeen another
development. Thishas becomenecessaryparticularly in nlass assenlblymallufacturing wherethe
ratio of input to output flowsis as great as 3 or 4 to I. ORen the preferewe is toengage third
paw logisticscontractors. Also manufacturers and such logistics contractors work closely in a.
spiritofpartnership to achieve mutualgains.
Third,the proportion of logistics costshas becomemore significant due to (a) the dramatic
reduction already achieved in manufacturingcost, and (b) colnpanies(Iryingto trade otf logistic
corn againstcompetitiveadvantage, Thisfact alson~eai~s
tl~it
i~lanagcments
musttry hard to
make a dent on these costsby focusingupon the k g variabl'es.
CheckYour Progress C +
1 Statethethree factorsthat distinglish doinesticlogisticsf~01n
irltcrnational logistics.
I
2 Listthe developmentsin international logisticswhich havemadepllysical distributionthe
most important plank of corporate stralegyin the developed countries.
I~~tmductiol~
to
Marketing Logistics
System
...................................................................................................................................
, ,
3 State'wlletherof the followingstateinwltsareTrue orFalse.
i) Studieshave shown that transport cost is inucll illorefornlidable an obstar:le laced
by developingcountriesthan the tariffs.
7. Illternational
Marketing Loglstlcr
System
ii) Movciiients between countriesare accoliipanied by a variety of docuxnents.
iii) Speedand e&ciencyof all links in the total transport chain are decreasedby
nlovenlentof goodsincontainers.
iv) The emphasisonjust-in-time inventorybased manufacturing in~plies
effective
controlon logistics.
V) Tlie new dimensionsof customer servicehold the key to a competitive
disadvantage.
1.9 ROLE OF INFORMATION TECHNOLOGY
The logisticsinformationsystem(LIS)isa subsystemofthe inanagenient ii~forniation
system
(MIS). Itprovidestheinforniationthat is specificallynceded for logistical management at
four levels.
First, the lowest level of thepyran~id
refers to transactions and inquiries. Exalnples of tlicse
activitiesare orderinquiries.orderprocessing, stock statuschecks. bill of ladingpreparation.
and transportationratelook ups. Such interactionswith the systemoccur asfrequciltly as many
times anhour, andspeed of theinformationflowis highlyimportant. Operative personnel such
as order-processingand transportation-ratcclerksaretypical users at this level.
Second,thenext higherleveluse of the infornlationsystcmsinvolvesfirst linc supervision.
Warehousesupervisorsmust exercise controlover spacecontrolover space utilization.
inventory,and labourproductivityinorder-fillingoperations. A truck-fleetmanager must have
thenecessarypeople, equipment. and spareparts to accomplishthe transportation niission and
schedule deliveries. The need for informatioilin the formofstatusand planning reports that
are generated almosteveryday,
Third, tactical planning and controlis an estensionof management at supervisory level inthat it
concerns planningthat is oftenrepeated in less than oneycar. Evaluation ofinventory control
limits, supplierevaluation. carrier selection. planningwarehouselayout, andplanningfor
seasonal space andtransportation needsareexamplesoftechnicalplanning and control
problem. Thesetaskscanfrequentlyinvolvemiddle managementsuch as themanager of
physical distribution ormanageroftransportation.
Anally, strategic(long-range)planninginvolvessettingthegoals,policies and objectives.
deciding on tlie overall logisticalstructureanddetenniningthe resourcesneeded for tlie supply
distributiontask. Speedofinformation availabilityis rarely critical, and the informition system
is interrogatedinfrequently. Manualprocedures and off linecomputer storage of the necessav
informationusuallyprove satisfactoryfor tllislevelofplanning.
1.9.1 Features of the Information System
Manual and co~nputerized
systcmsarebasically the same. A good system design supports the
management uses. Thebasic featuresofanintcgrated information system areidentified in
Figure 1.2. These featuresare reflectionof thebasicfunctionsthat the idonnation system
performs such as transfcming. storingand transforminginformation. The illfom~ation
system
must have the capabilityofmoving information fromthepoints whereit is obtained to tlie
points wliereit is needed,
,
Pipre 1.2 Basic Featuresof a Logistic Information System
Management
Infondation Data
DATABASE
Prepared
documents analysis reports
purchase orders,
bills of lading etc.
Computer
Files
Computing
! System
with
Database
I
-
-
-
-
-
+
- ./
7 1 '
1.9.2 System Design
Manual
Records
Y
Sumnlary
reports
Outputs
I
I For logisticsinformation system,it is necessq to have appropriatedatabase, dataretrieval
procedures, dataprocessing programme and data analysis. Dataforlogistics management
comesfrom difFerent sourcesand in differentformswhich is recorded manually and in
computer files. Appropriate decisionforthe methodologyof datastorap, retrieval and
criticalityof the information shouldbe decided.
Dataretrieval
Exception
reports
It is the datastorage and processing for which modem sopl~isticated
computer hardware isused
to assisttheorganization for decisioll nmking. Data analysissystmhelps themanagement to
correlateproduction schedule at differentplants, to meet customea requirement at different
locations,provide serviceto custonlers,built up inventories, reduce stock,transfer stock from
onewqrehouseto anotherwarehouse,monitor customer's payment, dispatch goodssonsidering
inventories,fleet managenlent, warrhousing cost,trampomtion cost, operating cost, etc.
!
8. Internatlonal
Marketing Logistlcr
System
1.9.3 Current Information Technology Applications in Distribution
Informationtechnologyhasamajor rolefor successfullogisticsmanagement, theprincipal
applicationsin distributionare :
Sales Order Processingand Invoicing :Many distributionoperationsservehighly
competitivemarket. Hence,it isessentialthat the informationabout salesorder is transmitted
by salesofficetothe distributiondepartmentin an efticientinannerfor dispatch. Information
technologyplays akeyrole in the controllingtheordercycle,dispatch and raising invoiceby
accountsforcustomers. Inforinationtechnologyalsohelps accountingfor necessary controls
overpaymentsfrom differentcustomers.
Warehousing and Stock Control :Integrationof stock records, salesorder processing,
replenislln~e~~t
of stocksand locationsof differentproducts at differentwarehouses are
controlledthroughit. It helps in transfer of stocksfrom one locationto another to reduce
inventoryand provide custolnersservicesin cost effectivemanner. It also helpsinproviding
the exact i~lfornlatioil
about deliveryschedule,and a nlultiproduct companyat multi-location is
abletoquickly initiatestepsforcorrelatingproductionandcustomersrequirement P
FleetMa~iuprnent
:Infornlationtechnologyassistsinvehiclerouting, scheduling, fleet
management,conlputerized roundplanningisused to evaluate, distribution,fleet mix, provide
costingto evaluatealternativedistributionnetworks.Successful implementationof
computerized round planningsystemrealizeon accurateandtimelyinformation about order
processing,cost control,order consolidation,distributionconstituentslike accessrestrictions,
lunchtime closing,etc.
1.10 LETUSSUMUP
Managementof logisticsof distributionis asimportantasanyother activityofmarketing. This
involvesplanning,impleinentation,andcontrol ofphysicalflowsofmaterialsand finalproducts
fromthepoints of originto the points ofuse in orderto meet customerneeds at a profit.
Broadly speaking,tllebasic objectiveof an ideal systemof logisticsis to move the right goods,
to theright place, attherighttimein good condition,and atthe lowestpossible cost. Tllis '
impliesthat afirinshouldail11at havinga logisticssystemwhich ensuresthedesired levelof
custonler service at the lowestpossiblecost. Some of the other specificobjectives in a given
marketingsituation,however, are: (1)improvethe customerservice (2) reducetotal distribution
costs(3) generateadditional sales(4) createtime and spaceutilities, and (5) stabilizeprices of
I products.
An effectivelogisticssystemcontributesinlmenselyto theachievementof marketing objectives
of a firm. Byensuringquick deliveryinminimum timeandcost, it relievesthe customers of I
holdinglargeinventories, On the globalscale,it allowsa geographicalregionto exploitits
inherent advantageby specializingin itsproduction effortsandprovidegoodsat competitive
prices.
-
The ilnportantcon~poneuts
of aneffectivesystemof logisticsare :(1) orderprocessing, (2)
warehousing, (3) inventories,(4) transportation,and (5)informationsystem. Order processing
involvesprocurement and asseniblingordered goodsfordispatchto thecustomer. Warehousing
involvesproviding necessarystoragefacilityat appropriatelocationsforconvenient delivery
and dispatch. 1nventor)idccisionsarebased primarilyonthe demandpatternsofvarious
products. A correctprediction inthisregard helpsinminimizingthe inventorycosts. As
regardstransportation, tliefirmhasto constantlyevaluatedifferentmodes oftransportation so
asto ensuresafe delivery at reasonable cost. Properinformationsystemis required for
ensuringa continuousflowof data on all aspectsofthe logistics system
Traditionally,tlie pl~ysicaIdistribution
isconsidered as 'the otherhalf ofmarketing'. The
marketing expertshave recogaizedthat superiorlogisticsperformance actsasa major source
for developing a position of sustainableadvantage. It is contended that instead ofviewing
distribution,marketingandlnanufacturingasseparateactivitieswithin thebusinesg theyshould
to unified,panicularly atthc strdtegiclevel. It isfurtheremphasizedthatthe twin arms of
marketingand logisticsshouldbe somanaged as to nlasi~ilize
thevalueadded through customer
serviceat lowest cost.
It isobserved that management of internatio~lal
logisticsis ~llucli
Inoreco~nplex
than the
domesticsystembecause (i) the logisticscosts are higher, (ii) the inechanicsofthe systemare
toointricateinvolvingnumerousperniissions,documentsand ~niddlemen,
and (iii) thepolitical
culturaland institutional factorsalsoplay a role. Tlusrcquiresa proactiveapproach. Moreover,
avariety of recent developnlents affectingboth supplyand denland of logistic seiviceshave
made it the most importantplank to corporatestrategy in the dcveloped countries,have
expandedlogistics services, created new opportunitiesfor carriers, and laid moreemphasison
just-in-time inventoryand the integrationof thetransporthilction withproductioq.
Theinformationtechnologyalsoplaysaninlportilntrolein managementof logisticssystem.
Logistical information needs canbe divided intofourlevels,viz.,transactionsand enquiries
(orderprocessing andtransportation),first line supervision (controlover spaceutilization,
inventoryand labourproductivity),tactical planningand control (evaluationof inventorycoiltrol
limits,carrier selectionhcilities,planningwarehousing), and strategicplanning (goals, policies
and objective). An eficient managementof inforinationsystemwould be of immenseuse in
controlling costs, improvingservicesand determiningtlic overall effectiveiiessofthe
distributionsystemof the firm.
1.11 KEY WORDS
Containerisation :Placingthe goods into colltaillersensuringtllc carriageof goodsby one or
moremodes of transportwithoutil~tertnediate
de-stufl~ng
and stufingof container.
Inter-modal transport :Movementof internatiotul containerizedfreightfroma shippers
premises to consignee'swarehouseusing differentmodesof transport enroute.
Inventory :The stock of goods
Jugt-in-time concept : Supplyofgoodsto a production line, a warehouse, or a customerjust as
they areneeded by maintaining zero or littleil~veiltory
Landed Cost :Productionplus logisticscost.
Lead time :Time gapbetweenplacingthe order and receivingthe supply
Marketing Logistics :Process of pl~ysical
llows of materials and find products fromthe point
of originto the point of use. It involvesactivitiessuch as orderprocessing, warehousing,
inventorycontrolandtransportation.
Vendorappraisal system :A systelilof ascertainingtlie strengtlisand weaknessesof suppliers
for selectionof the supplier.
1.12 ANSWERS TO CHECK YOUR PROGRESS
A 4 (i)False (ii) True (iii)T n ~ e(iv)False (v)Tnle (vi)False
B 4 (i)Customer's order (ii)inventory (iii) major proportion (iv) shortening
(v)customer
C 3 (i)True (ii)True (iii) False (iv)Tnie (v)False
I~itrodactIonto
Marketing Logistics
System1
9. Internafio~~nl
~ a r k c t i ~ , p '
~ i ; o ~ i s t i c s
System
1.13 TERMINAL QUESTIONS
1 DefineMarketingLogisticsand explainitsobjectives.
2 What arethe mainactivitiesinvolvedin marketinglogistics? Explainthembriefly.
3 Why doyou regard logisticsasan important activityof marketing? Explainit with
specialreferenceto internationaltrade.
4 "Differencebetween domesticand internationallogisticscanbe saidto arise onaccount
ofthreemajorfactors." Elaborateonthis statementandenumeratethe recent
developmentsin internationallogisticsthathavemadeitanimportantplank ofcorporate
strategy.
5 Inthecohtex? oftradeliberalisationpolicies inIndia, examinetheimportance of
a) domesticlogestics
b) internationallogistics
6 You arefreetopurchasetea, process and back it,and exportitto a buyer inU.K. Plan
logisticssetup right upto theconsumer.
7 Commentonthefollowingstatements.
a) Traditionally,physicaldistributionisconsideredas theotherhalf ofmarketing.
b) Distribution,marketingand manufacturingcannotbeviewed asseparate
activitieswithinthebusiness, particularlyatthestrategiclevel.
C) Logisticssystenlhelpsinimprovingthecustomerservice.
8 Statethefourlevelsat whichlogisticsinformationisneeded and explainthe main
featuresofanintegratedinformationsystem.
ST EGIES AND LOGISTICS
Structure
2.0 Objectives
2.1 Introductio~l
2.2 CustonlerService
2.3 StrategicLogisticsPlanning
2.3.1 Major Aspects of Strategic Logistical Planning
2.3.2 Factors Influencing Logistics Planning
2.4 StrategicDistributionArrangements
I
2.5 TheThreeImportantConcepts
2.5.1 The Cost Trade O
f
f
s
! 2.5.2 The Total Cost Concept
2.5.3 The Total System Concept
2.6 EnvironmentofForeignTrade
2.6.1 Nature of Internatiot~alDistributio~~
2.6.2 Competition
2.6.3 Govcrnmcnt Regulation
2.6.4 Othcr Relevant Aspects
2.7 Challengesof theMarketPlace
2.8 BalancingFunctionalObjectives
2.9 Integrationof SystemsFunctionsinInternational SupplyChains
2.10 LetUsSumUp "
2.11 K
e
y Words
2.12 Answersto CheckYour Progress
2.13 TerminalQuestions
-
2.0 OBJECTIVES
After studyingthis unit,you should be able to :
explainthe expectationsof customersfromthepl~ysical
distributionsystem
describetheftameworkforstrategiclogisticsplanning, i
t
sthreemajor aspects,andthe
- --factorsjhatinfluenceit
explainthestrategicdistributionarrangements
describethe threebasicconceptsrelevantto managingphysical distributionofproducts
explaintheH i a r i t i e s offoreigntriodeenvironmentthat formlogisticiansto adopt a
differentapproachtophysical distr1bvtionin internationalmarketing
identifythe conflicting functionalobjectives of logisticssystemand describethe strategy
usedforbalancing them.
explainthe horizontalandvcrtical integrationofsystem functionsininternational
supplychains.
