Customer Value Chain from Logistics

In recent years, the following three forces have changed the perspectives on logistics:

1. Globalization
2. Focus on supply chain management
3. Outsourcing of non-core-competency functional areas

The entire world has become a global village for the marketers because of the liberalization of economies of countries and the emergence of World Trade Organization (WTO), which is forcing the business organizations to supply products beyond the national boundary wherever there is a market opportunity. In such a situation, the role of logistics will include providing the time and place utility of the products to the customers.

Businesses across the world are striving to be competitive. Business organizations are strug­gling not only for growth but also for survival. In the process, the focus has changed to the supply chain; that is, integrating a process of procurement, processing, and distribution with one thread to deliver the value to the customer. Logistics plays a key role in the value delivery process, and the success of supply chain management greatly depends on logistics planning and its support.

Outsourcing is becoming an acceptable trend in business. Corporations have realized that doing everything by themselves does not result in effective and efficient use of the scarce resources available to them. It is better to outsource the functional areas to an expert who can do the job at the least cost and can bring effectiveness and efficiency to the operations. Logistics is an area in which a majority of the business organizations have no core competency, and hence it needs to be outsourced for operating effectiveness and efficiencies. Today, logistics is shaped into a separate service industry offering complete customized logistics solutions specific to products, shipments, customers, or markets.

Michel Porter was the first commentator to highlight the need for business organizations to understand that competitive success could only come through cost leadership or by offering dif­ferentiated product and services. Costs can be reduced by an effective logistics management, which will also enhance the differentiation through superior customer service. As shown in Figure 1.1, the value chain activities of a firm can be categorized into primary activities consisting of inbound logistics; operations; outbound logistics; marketing, sales, and services; and support activities such as infrastructure, human resource management, technology development, and procurement.

Logistics delivers value to the customer through three logistical phases:

1. Inbound logistics—Operations preceding the manufacturing. This includes movement of raw materials and components for processing from suppliers.
2. Process logistics—Operations directly related to processing. This includes storage and move­ment of raw materials and components within the manufacturing premises per the manu­facturing schedules. The inventory management of stored materials and in-process goods is part of process logistics.
3. Outbound logistics—Operations following the production process. This includes the warehous­ing, transportation, and inventory management of finished products.

In all above categories of logistics, both physical flows of products from a raw material supplier to the end customer in the forward direction and flow of information from market to the raw material supplier in the reverse direction are monitored and controlled.

Logistics cost break-up in the above three categories shows a larger percentage in outbound logistics and in component-wise, transportation (see Table 1.2) covers the larger proportion.

The total logistics cost as percentage of the sales differs with product categories. For low unit value mass distributed products, the logistics cost may be 30-40 per cent of the sales value, which in the case of high value engineering items may not exceed 5-8 per cent. With proper systems and controls, the logistical cost, which will be ultimately loaded on to the product and borne by the cus­tomer, can be reduced, and the benefits can be passed on to the customer by way of value addition through a combination of price, quality, and service.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.