Ebook International Trade Procedures and Documentation: Part 2 presents the following content: International Transport System; Characteristics of Shipping Industries; Containerization and Leasing Practices; Inland Container Depots; Export Incentives Schemes;...Please refer to the documentation for more details. 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Hitesh Jhanji, Lovely Professional University Unit 7: Logistics and Characteristics of Modes of Transportation Unit 7: Logistics and Characteristics of Modes of Transportation Notes CONTENTS Objectives Introduction 7.1 Definition 7.2 Planning Physical Distribution 7.3 Benefits of Efficient logistics system 74 Concept of Marketing Logistics system 7.9 Logistics and the Modern Organization 7.6 Critical elements of logistics system 7.7 Summary 7.8 Keywords 7.9 Review Questions 7.10 Further Readings Objectives After studying this unit, you will be able to: e Explain Planning Physical Distribution ° Discuss the Benefits of effective logistics system ° Describe the Concept of marketing logistics ° Explain the Critical elements of logistics system e Discuss Logistics and modern Organisation Introduction Logistics is the one of the most important segment of the phenomenon of Marketing in business It is a subset of Supply Chain Management In the business functioning, the trader gets order for supply of his goods or services through his marketing executives or directly from customers and then to execute the order to the satisfaction of the customer, the trader or his supplier company prepares the Logistics, i.e procures the product or services, puts labels on them, or gives some identification trademark name to them, makes necessary packing and packaging so as to save them from damage of any kind during loading, unloading, handling, transportation, etc till is supplied to the end customer More simply, it is a bundle of goods finally ready to be supplied to the customer In Logistics study, all factors contributing till the last stage, when the goods or service is finally supplied to the consumer are systematically studied 7.1 Definition The word, Logistics’ is derived from French word ‘Loger’, which means art of war pertaining to movement and supply of armies LOVELY PROFESSIONAL UNIVERSITY 149 International Trade Procedures Notes and Documentation A military concept Fighting a war requires: + Setting an objective + Meticulous planning to achieve the objective + Proper deployment of troops * Supply lines consisting of weaponry, food, etc A logistics plan should be such that there is minimum loss of men and material Similar to fighting a war in battlefield, marketing managers also prepare a suitable logistics plan that is capable of fulfilling the company objective of meeting the demand of targeted customers in a profitable way im Notes Inbound logistics + Material Management + Physical Distribution = Logistics Inbound logistics means the movement of materials received from suppliers Material management means the movement of material and components inside a firm Physical distribution refers to movement of goods outward from the end of the assembly line to the customer Supply chain management is larger than logistics and it links logistics more directly within the user’s total communication network and with the firm engineering staff It not only includes manufacturer and suppliers but also transporters, warehouses, retailers and customers themselves According to Council of Logistics Management: “Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming the customer requirement” Logistics management includes the design and administration of systems to control the flow of material, work-in-process, and finished inventory to support business unit strategy 7.2 Planning Physical Distribution The main goals of Distribution in any Organization would be to take care of proper storage and transport While Storage assures product and packaging quality and constant availability, Transportation’s objective is to ascertain that products arrive in good condition, in the right place and at the right time The less frequent a Firm’s re-supply, the greater would be its storage requirements 7.2.1 Distribution Considerations For proper Storage & Transportation, the SC Manager has to ensure availability of transportation (i.e., vehicles) He or she has to also take care of security the materials are being transported from one point to another Security during storage also needs proper attention What is also important is the availability sufficient storage space/capacity This shall be based on procurement plan and frequency of deliveries at all levels of the system 150 LOVELY PROFESSIONAL UNIVERSITY Unit 7: Logistics and Characteristics of Modes of Transportation Technology has been changing very fast and as a result, the Product Life Cycles have become shorter The short shelf life of products has been putting pressure on the Transport Function to deliver goods as quickly as possible In addition to all these considerations, the SC Manager may have to also worry about appropriate storage conditions (cool chain), if the Products need to be preserved using this facility What is also important is the mode of transportation to be used Also, the Pick-up system (facilities collect drugs) or delivery system (warehouses deliver) has a bearing on the Distribution Notes Another important factor is the decision to outsource transportation or not One may have to also worry about aspects such as having appropriate procedures to: e Verify the products shipped and received — type and quantity, ° Conduct visual inspection for quality assurance, including expiration dates, ° Complete and sign transaction records/vouchers, ° Store the products, and ° Update stock-keeping records The main objectives of logistics management are: e Inventory Reduction ° Reliable & Consistent Delivery Performance ° Economy in Freight ° Minimum Damages to the Product ° Quick Response ° Optimum Contribution towards business excellence 7.2.2 Inventory Reduction Inventory Reductions have far-reaching implications on Company’s Return On Investment (ROT) However, really speaking, it is a ‘tight rope walk’! While excess stocks may affect the Profitability, not having enough inventories may result in “Loss of Customers’ Therefore, one has to exercise proper control over Inventory, by taking appropriate steps at the right moment Objective of Inventory Control Systems The objective of an inventory control system is to ensure the constant availability of products, by defining: e When products should be ordered e What quantities of products should be ordered e How to maintain adequate quantities to meet demand, while avoiding overstocks and stock-outs Inventory Control Systems Maximum/minimum Inventory Control System is defined by months of stock Systems are designed so that stock quantities routinely fall between the minimum and maximum stock levels The minimum stock level includes safety/buffer stock Any inventory control system (max/min or other) must take into account safety/buffer stock (However, environment, the system of maintaining safety /buffer stock is not practiced.) LOVELY PROFESSIONAL in a Just-In-Time UNIVERSITY 151 International Trade Procedures Notes and Documentation Inventory Control Considerations Some of the prime considerations are: ° Who decides what quantities to distribute? * The lower level (pull) or the upper level (push)? + Decision should be based on training and human resource implications e Which type of max/min system to use? ° How long should the pipeline be? * Longer pipeline reduces likelihood of stock-outs (more security stock) but increases likelihood of wastage e (short shelf lives, increased expiries) How to include safety stock levels in a non-max/min system Reliable and Consistent Delivery Performance Customer Service is the key interface between Marketing and Logistics It plays a significant role in developing and maintaining customer loyalty and continuous satisfaction Logistics also supports the “place” element of marketing mix However, in the areas of Product, Pricing and Promotion, Competitors may equal! Hence, there is a need to excel consistently in Customer Service through reliable & consistent delivery performance Freight Economy The various Transportation Carrier Options available are: Truck, Rail, Water, Pipeline and Air Inter-modal transportation is becoming more common since it is really not possible to use only one mode of transportation in most of the cases Transportation by Road is perhaps the only mode which can be used independently 7.2.3 Transport Fundamentals Freight/Transport is the most important component of logistics cost Usually 1/3 — 2/3 of total cost is the result of Transportation Transport involves e Equipment (trucks, planes, trains, boats, pipeline), e People (drivers, loaders & unloaders), and e Decisions (routing, timing, quantities, equipment size, transport mode) A Caution When deciding the transport mode for a given product, there are several things to consider such as mode price, transit time &variability (reliability) and lastly potential for loss or damage =/714| Note In developing countries we often find it necessary to locate production close to both markets and resources, while in countries with developed distribution systems people can live in places far from production and resources 152 LOVELY PROFESSIONAL UNIVERSITY Unit 7: Logistics and Characteristics of Modes of Transportation Single-mode Service Choices and Issues Notes Air e Rapidly growing segment of transportation industry e Lightweight, small items (Products: Perishable and time sensitive goods: Flowers, produce, electronics, mail, emergency shipments, documents, etc.) e Quick, reliable, expensive ° Often combined with trucking operations Rail e Low cost, high-volume (Products: Heavy industry, minerals, chemicals, agricultural products, autos, etc.) e Improving flexibility ° Inter-modal service Truck e Most used mode e Flexible, small loads (Products: Medium and light manufacturing, food, clothing, all retail goods) e Trucks can go door-to-door as opposed to aeroplanes and trains Water ° One of oldest means of transport e Low-cost, high-volume, e Bulky, heavy and/or large items (Products: Nonperishable bulk cargo — Liquids, minerals, slow grain, petroleum, lumber, etc.) ° Standardized shipping containers improve service ° Combined with trucking & rail for complete systems ° International trade Pipeline e Primarily for oil & refined oil products ° Slurry lines carry coal or kaolin e High capital investment e Low operating costs ° Can cross difficult terrain e Highly reliable; Low product losses Transport Cost Characteristics Transportation costs will be fixed costs as well as variable costs Both these costs must be reviewed frequently and efforts must be made to bring these down LOVELY PROFESSIONAL UNIVERSITY 153 International Trade Procedures Notes and Documentation Examples of fixed costs: Terminal facilities, Transport equipment, carrier administration, Roadway acquisition and maintenance [Infrastructure (road, rail, pipeline, navigation, etc.)] etc Examples of variable costs include: Fuel, Labor, Equipment maintenance, handling, pickup & delivery, taxes etc im Note ° ° ° e Cost structure varies by mode Rail * High fixed costs, low variable costs * High volumes result in lower per unit (variable) costs Highway + Lower fixed costs (don’t need to own or maintain roads) + Higher unit costs than rail due to lower capacity per truck * Terminal expenses and line-haul expenses Water + High terminal (port) costs and high equipment costs (both fixed) + Very low unit costs Air Substantial fixed costs + ° Variable costs depend highly on distance traveled Pipeline + Highest proportion of fixed cost of any mode maintenance and extremely low variable costs due to pipeline ownership and Minimum Damages to Product Logistics Management must ensure that no/absolute damage happens while the product is in the custody of Logistics Damage Costs incurred during transportation should be considered as a throughput cost, since they will continue regardless of inventory levels » Did u know? Damage attributed to Warehouse Warehouse Operator, if the cost is unreasonable operation is usually charged to the Quick Response [QR] Quick Response is generally a retail sector strategy, but can be tried by other industries too Quick Response applies JIT principles throughout the entire supply chain The concept works by combining Electronic Data Interchange (EDI) with Bar Coding Technology, so that Customer Sales are tracked immediately This information is immediately passed on to the Manufacturer and from there to the suppliers to enable all the partners to plan, produce and deliver the replenishments to meet Customer Requirements quickly 154 LOVELY PROFESSIONAL UNIVERSITY Unit 7: Logistics and Characteristics of Modes of Transportation The benefits of such a system are: Notes Inventory Reduction Speedier Response Lower number of stock-out situations Reduced Handling Reduction in Obsolescence Contribution towards Business Excellence About two decades back, Logistics Function was one of the neglected areas It was looked at as a Cost Center Not many organizations managed this function in a profession way Gradually, the situations changed With customer becoming more and more demanding, organizations realized the importance of this function and the role played by it in meeting the customers’ expectations ° Logistics primarily embodies the effort to deliver: ° The right product ° In the right quantity ° In the right condition e To the right place ° At the right time e For the right customer ° At the right cost [n> Task What role is played by logistics towards business excellence? 7.3 Benefits of Efficient Logistics System NDT FF YW N PF Logistics has gained importance due to the following trends: Transportation costs have risen rapidly due to the rise in oil prices Production efficiency has scaled new heights Fundamental changes in inventory Proliferating product lines Computer technology Increased use of computers Increase in public concern about the product Growth of several new, large retail chains or mass merchandise with large demands and very sophisticated logistics services, bypassing traditional channels and distribution Economic regulation reduction Increase in power of retailers 10 Globalization LOVELY PROFESSIONAL UNIVERSITY 155 International Trade Procedures Notes and Documentation The interrelation of different logistic elements and their costs should be based on total cost rather than individual costs Self Assessment Fill in the blanks: — logistics means the movement of materials received from suppliers objective is to ascertain that products arrive in good condition, in the right place and at the right time The objective of an control system is to ensure the constant availability of products Customer is the key interface between Marketing & Logistics —— & continuous plays a significant role in developing and maintaining customer loyalty satisfaction must ensure that no/absolute damage happens while the Product is in the custody of Logistics aseeeseseeeseeseeseeses Costs incurred during transportation should be considered as a throughput cost, since they will continue regardless of inventory levels Transportation by Road is perhaps the only mode which can be used The main goals of in any Organization would be to take care of proper storage & transport 10 Transportation“s obJective is to ascertain that arrive in good condition, in the right place and at the right time 7.4 Concept of Marketing Logistics System Managing the components of Logistics, like — product (procuring, assembling or self-production), form (shape, size, label, design), time (the period of booking and execution of the order), quality (quantity, material, colour, in view of the competitive products in the market, or as per demand of the customer), price (low, high, competitive), services (labelling, packaging, transportation, supply) — are the vital factors in the overall marketing process Simply, Logistics is a subsystem of Supply Chain Management, which is a key part of Marketing process 7.4.1 Relationship of Logistics to Marketing and Production While the production element in the marketing-mix leads to creation of ‘form’ utility by taking decisions as product line variety, design, colour brand, etc The distribution element comprising distribution channel fixation and physical movement, creates ‘time’ and ‘place’ utility by ensuring that the produced goods reach the place and time selected by the buyer Logistics is the designing and managing of a system in order to control the flow of material throughout a firm This is a very important part of an international company because of geographical barriers Logistics of an international company includes movement of raw materials, coordinating flows in and out of different countries, selection of transportation, cost of the transportation, packaging of the product for shipment, storage of the product, and managing the entire process 156 LOVELY PROFESSIONAL UNIVERSITY Unit 7: Logistics and Characteristics of Modes of Transportation eos Figure 7.1: Relationship of Logistics to Marketing and Production LOGISTICS Sample PRODUCTION/ OPERATIONS Gaaolz arljbflfes: ae ` * Detailed production acheduling Bars i maint ¢ Equipment ¢ Capacity planning == MARKETING irl nventory activities: * Product scheduling ® Plant locations processing  Materials handlingB service standards đâPxcaging Pricing * Market research ep sh roductc * Retail ¢ Sales force management ¢ Order * Purchasing ¢ Work measurement & standards interface Uệm Interface activities: ¢ Quality control Productionlogistics tr Notes K ntetjace Sample activities: ¢ Customer ¢ Promotion location _ ae Marketing‡ - logistics interface Internal Supply Chain Note Logistics is a link between the manufacturing and selling process that leads to the creation of place and time utility 7.4.2 Marketing Logistics In 1991, the Council of Logistics Management (CLM), a prestigious professional organization, defined logistics as “the process of planning, implementing and controlling the efficient, effective flow from the point of origin to the point of consumption for the purpose of conforming to customer requirements” Logistics is the art of managing the flow of raw materials and finished goods from the source to the user To obtain goods from where they arise to the right place in the right form, at the right time, at the right cost “Logistics or physical distribution or distribution logistics is a part of Marketing Process” In order to position logistics in its proper role in today’s business environment, logistics leaders will have to a better job of communicating, or marketing, logistics The time for lamenting the lack of interest in logistics from senior management is over, and the time to become proactive is here The logistics story will be understood when all logistics leaders begin to take the marketing initiative and the successes of the discipline are recognized Logistics executives are eager to be considered important players in the corporate game They want to be involved in important decisions, to something meaningful for the company, and to be recognized by their peers as members of a winning team However, it seems that sales, marketing, and manufacturing enjoy the focus of management attention Why? Let us suggest that logistics executives have done a poor job of marketing logistics within the organization This concept of “marketing” logistics borrows from the traditional concept of marketing In other words, identify your customers, identify their needs, and combine the firm’s resources to meet those needs However, the concept of logistics marketing goes a little further The purpose of this paper is to introduce the concept of the P’s and to provide the logistics executive with a framework for its implementation The following discussion will focus on product, price, place, promotion, and people as elements of the logistics marketing mix LOVELY PROFESSIONAL UNIVERSITY 157 International Trade Procedures Notes and Documentation Product One function of logistics marketing is finding out who your customer is and how to get the product or service to the customer Each customer can have individualized needs so the logistical services provided may vary from customer to customer Regardless of these differences, the customers expects 100 percent conformance and assured reliability at all times with every transaction The goals of this aspect of marketing logistics include filling the order, on-time delivery, precise invoicing and zero damage Price An organization bases pricing decisions on both internal and external factors Marketing logistics must recognize price drivers The profile of the customer, the product and the type of order are factors that drive the price These changes are not typically controlled by marketing logistics However, marketing logistics must react to these factors and understand how the factors affect customers’ decisions Discounts for quantities and the related logistical cost structure can impact the price the customer will ultimately pay for the product or service Additional factors driving price include the shipping costs based on the size, weight and distance the organization will ship the item Further, the size of the manufacturing run, labor costs and the types, quantities and quality of the materials used in the manufacturing process can affect price Promotion Promotion is another important aspect of an organization’s marketing logistics process When bringing a product to market, the organization must coordinate the logistics of the various marketing materials For example, the art department might design the artwork for the product’s box and an outside supplier might manufacture the boxes with the artwork Marketing logistics can help to ensure that all of these entities work together and produce the marketing materials needed to sell the product Place The function of place in marketing logistics allows the organization to simplify the transactions between a logistics provider and the customer The organization must execute logistics in such a way that the customer is not aware of the complexities involved in the logistics process For the customer, the output is always more important than the process The organization should, therefore, never expose the backroom processes involved with logistics delivery to the customer Also the location of the factory, warehouse and customer can greatly impact the marketing logistics process by increasing or reducing costs Example: Locating a factory in Mexico might reduce the labor costs associated with a product However, at the same time locating the factory in Mexico might increase the shipping costs and negate any cost savings 158 LOVELY PROFESSIONAL UNIVERSITY