Logistics means controlling the material flow from the source of raw materials to the end customer in such way that the product is available in the right place at the right time, and in such way that minimizes costs and other disadvantages such as negative environmental or safety risks.
In addition to transport and warehouse, the actual flow of material, logistics also consists of planning flow of information and money as well as examination of social and environmental impacts.
About Logistics term
Logistics have been carried out as long as there was a trade in goods or services. The concept of logistics began to be in use as a term by top management in the 1950s in the United States. Before that, logistics was mainly connected for use in war and military operations. Later, attention was paid to the total costs, their reduction and to the development of warehousing and transportation. Mainly after year 2000 managing the entire supply chain started to have more focus.
Logistics has developed a number of slightly differing definitions. In addition to the above definition, logistics means planning of materials and services associated with productive and cost-effective purchasing management, warehousing, transportation and distribution, implementation and monitoring so that at the same time customer requirements are taken into account.
This definition includes as well company’s inbound, inhouse as the outbound logistics. Also, logistics can be seen as a process or a series of different functions. Logistics can also be defined in brief:
Logistics is the management of product or service and information and money associated with it in the organization to meet customer needs.
Logistics definition also highlights needs of a customer. Identification and anticipation of these needs have crucial role for the business to be successful and profitable. Customer focus and customer orientation are the foundation of a successful business.
Importance of Logistics
Business does not work without logistics. Effective and efficient logistics is vital for operations of the organizations. Logistics is recorded at the EU level as one of the key industries of business, which aims to improve competitiveness of the member states. Logistical problems can cause major damage to the global economy. It was noted, for example, in the spring 2010 when the ash cloud caused by Icelandic volcano paralyzed air traffic in Europe.
Long distances for export industry’s main markets cause special requirements for Finnish logistics as well as dependence on maritime transport and domestic thin flow of goods. On the other hand, Finland compared internationally, has a small market, where the population is only approximately 5.5 million. According to logistics survey in 2014, Finnish logistics costs in relation to GDP is approximately 11.4 per cent, which internationally is a high number. A part of the difference is caused by differences in industries. Logistic costs of heavy industry (e.g. Forest and metal industries) are higher than e.g. of the pharmaceutical industry (due to Finland’s geographical distance to the main markets, to European Union countries). However, there is much can be done with cooperation of freight forwarding industry, its customers and with authorities.
Logistics goal is to deliver raw materials, semi- finished and finished products to the place, on time with quality and quantity as agreed. Delivery should be handled in compliance with the service level chosen by each company so that company ‘s financial result is as good as possible. At the same time environmental burden should be as low as possible.
Logistics can not be fully understood unless one has created an overall picture of the business environment. It is not enough to view one part without considering issue as a whole. For example, procurement decisions have an impact among other things on current assets, production and distribution. Logistics should be seen as the overall process with the aim to develop the entire order – supply chain competitiveness.
Logistics strategy helps significantly in supply chain management and allows operations to be planned and outlined on a multi- year time span. It includes systems and processes planning, implementation and monitoring and operational control. With Logistics strategy is aimed at the best possible profitability and cost-effectiveness. At the same time unnecessary phases and functions are removed to save time and money. Logistics strategy goals are reducing costs, reducing tied up capital and improving service
Cost reduction strategy focuses usually on minimization of storage and transport costs. Reduction of tied up capital aims at that money is tied up as less as possible in the logistics system. In addition, the aim is to improve the rate of return on investment. That is why, for example, products are transported directly to customers to reduce storage, use of the common stocks instead of own stocks or use a third party that is logistics services provider. In these cases, the variable costs may increase, but the return on investment grow instead.
Service improvement strategy based on the principle that profits depend on the level of logistics services. Service-oriented strategy is focused to offer the customer a sufficiently high level of service, to achieve a significant competitive advantage. When using such a strategy costs increase fast because logistics customer service level is increased. However, increased profits compensate or even exceed increased costs. In order to implement value added services, company should, however, ensure that customers are willing to pay for it too.
Logistics strategy should be closely integrated into company’s all the functions. This is to ensure its implementation. Decisions made on the strategy level must be followed in all logistics operations. In many companies the problem is that decisions made in the practical daily work are not aligned with the strategy.
Logistics strategy may not always be in written form. There are a lot of successful companies that have no written strategy, but it is built into company’s operations. However, a written strategy aligns activities, promotes compliance with common working methods and facilitates, for example, orientation of new employees.
The most important strategic decisions in supply chain management are, for example, storage and factory location selection, outsourcing, warehousing policy and selection of distribution channels.
In general, the base for logistics strategic decisions is the proximity to raw materials or markets. Also, supply chains’ and networks’ memberships, roles and control methods are very important issues to decide. Networks must be noticed, for example, when searching for subcontractors and cooperation partners or building a distribution system.
Logistics strategy should process at least the following:
- current state of logistics (procurement, storage, transport and distribution, reverse logistics, supply chain management
- success factors, goals and targets (customers, products, service level, outsourcing)
- management and organizing (relationships with suppliers and network partners)
- implementation of the strategy in practice (resources and procedures)
Distribution channel structure is one of the main supply chain planning decisions in terms of manufacturing company. When using innovative strategy distribution channel should be flexible and number of distribution stages and storage of products must be minimized. In order to implement the best service strategy is to ensure good product availability and service speed and flexibility. In the lowest prices strategy company ‘s should have cost-effective logistics. Distribution channel is often centralized, storage amounts are small and customer orders must be large.