The process of logistics strategies formulation can be viewed through the following three angles:
- Customer needs met through the implementation of strategies
- Target customers
- Resources required for implementation of strategies
Logistics strategy formulation is not a process that can be initiated in isolation. In fact, logistics strategies should have a goal congruent with the overall strategy of the business. In other words, there should be synergy between the logistics strategies and the other functional domains of the organization. For example, the management information system, which encompasses all functional areas of the business, has the strongest synergy with logistic operations, as logistics is an information-based activity for inventory movement across the supply chain. The success of logistics strategy implementation greatly depends on the sharing of information with internal and external customers and maybe sometimes with logistics partners. The transparency at the transaction level at both ends (buyer and seller) helps build an element of trust and thereby adds value to the customer delivery chain, thus making the strategy implementation task easier and successful.
To understand the strategic dimensions of logistics, we have a few generic logistics strategies successfully implemented by leading corporations across the world.
1. Cost Leadership
The basic approach to this strategy domination is through logistics cost reduction. The road map to achieve this is:
- Reduction in inventory and inventory-related cost through JIT, cross-docking or postponement
- Freight consolidation, mode and route selection for reduction in transportation cost
- Scale economics in warehouse operations
- Reduction in transaction cost through IT support
- Reduction in vendor base and co-partnership with suppliers
- System approach with IT as the backbone (reducing the human element) for error-free logistics operation
Differentiation through superior service quality that is beyond the reach of competitors, such as:
- Committed/guaranteed delivery time: Dell Computers deliver customized PCs at the doorstep of customers anywhere in the United States, within 48 hours of order placement.
- Customized logistics solution: Radhakrihna Foodland, a 3PL service supplier, managed the complete inbound logistics operations of McDonalds in the past in India through their cold chain network across the country, which is customized for processed food products.
- Consignment tracking: Leading 3PL service suppliers, such as AFL, FedEx and Blue Dart are offering Web-based consignment tracking and tracing facility to their customers.
- Penalty for defaults: Offering guaranteed delivery on time and accepting penalty for deviations.
3. Value Addition
3PL suppliers are providing some extra services to clients in addition to the usual logistics services so as to add value to their service offerings such as:
- Cobbling: To avoid wasteful practices in transportation and storage, TCI is cobbling together the backhaul arrangements between different MNCs (Nestle, J&J, and HL) in India for distribution in Uttaranchal. In the United States, General Mills’ ‘Yogurt’ and Land O’ Lakes’ ‘Butter’ are transported in the same trucks on their way to the same supermarkets, with the advantage that both the companies have lower distribution cost and higher customer satisfaction.
- Payment collection: Gati now offers the service of payment collection from the consignee against delivery of material.
- Customs clearance: Logistics service suppliers provide this service to their customers for import and export consignments. This service is offered since a majority of exporters and importers do not have expertise in this area of logistics operations. It is especially useful for those who are not conversant with government rules and regulations.
- Packaging and labelling: 3PL operators provide this service to the customer who does not want to maintain a packaging material inventory and/or who lacks the facility or resources to pack the manufactured material or break-bulk imported material. In addition, the service of fixing labels and price tags is undertaken.
- Vendor-managed inventory: To reduce inventory-related cost of critical input in the client’s product, suppliers offer the service of managing the inventory of that item at the client’s place. The inventory ownership lies with the supplier, who bills the customer for the inventory consumed or that has exchanged hands. The supplier maintains minimum inventory at the small place allocated to him in the client’s manufacturing premises. Truck tyre manufacturers in India adopt this strategy for their original equipment manufacturer (OEM) clients (truck manufacturers).
Manufacturing firms opt for the strategy of alliance with experts in logistics to reduce cost and simultaneously bring efficiency and effectiveness into their logistics operations. The desired results are achieved by outsourcing these operations to logistics service providers who have expertise in the relevant functional areas. Telco, Pune (India), has completely outsourced inbound and outbound logistics to Dynamic Logistics—a 3PL firm. As a result, the logistics cost of Telco has come down to half, without any compromise on efficiency and effectiveness in their operations.
After liberalization of the Indian economy in 1991, to bring competitiveness in the business operations, a majority of leading firms began outsourcing non-core but critical activities such as logistics to 3PL partners so as to focus on their core business. With outsourcing, they have access to best practices and technology in the outsourced functional area and their assets are released for more productive activities.
Manufacturing firms that have voluminous logistic operations adopt the strategy of diversification in the logistics operations. Their objective is better ’cost and operational’ control, as well as to provide superior customer service. Such firms start with a separate division to gain the expertise and then spin off into an independent logistics firm to serve other customers. The Tata Group of Industries, for instance, is reportedly planning to set up a separate logistics company to undertake logistics operations for other groups of companies so as to enable them to provide superior service to their customers.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.