Logistics & Channel management

Chapter one:-An overview of Logistics & Channel management

Learning Objectives

Upon completion of this chapter a student will be able to:

o Definition of logistics
o Activities of Logistics (logistics fields)
o The role and importance of logistics
o Logistic systems, costs and components
o The objective and aim of logistic system
Introduction

All organizations move materials. Manufacturers build factories that collect raw materials from
suppliers and deliver finished goods to customers; retail shops have regular deliveries from
wholesalers; a television news service collects reports from around the world and delivers them
to viewers; most of us live in towns and cities and eat food brought in from the country; when
you order a book or DVD from a website, a courier delivers it to your door. Every time you buy,
rent, lease, hire or borrow anything at all, someone has to make sure that all the parts are brought
together and delivered to your door. Logistics is the function that is responsible for this
movement. It is responsible for the transport and storage of materials on their journey between
suppliers and customers.

1.1. Definitions of logistics

Every organization delivers products to its customers. Traditionally we have described these
products as either goods or services. Then manufacturers like Sony and Guinness make tangible
goods, while AOL and Vodafone provide intangible services. In reality, this view is rather
misleading, and every product is really a complex package that contains both goods and services.
Ford, for example, manufacture cars, but they also give services through warranties, after-sales
service, repairs and finance packages. McDonald’s provide a combination of goods (burgers,
cutlery, packaging, and so on) and services (when they sell food and look after the restaurant). It
is more accurate to describe products as lying on the spectrum shown in Figure 1.1.

At one end of this spectrum are products that are predominantly goods, such as cars and
domestic appliances; at the other end are products that are predominantly services, such as
insurance and education. In the middle are products with a more even balance, such as restaurant
meals and hospitals.

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At the heart of an organization are the operations that create and deliver the products. These
operations take a variety of inputs and convert them into desired outputs, as shown in Figure 1.2.
The inputs include raw materials, components, people, equipment, information, money and other
resources. Operations include manufacturing, serving, transporting, selling, training, and so on.
The main outputs are goods and services. The Golden Lion restaurant, for example, takes inputs
of food, chefs, kitchen, waiters, and dining area; its operations include food preparation, cooking
and serving; the main outputs are meals, service, customer satisfaction, and so on

The products created by an organization are passed to its customers, giving the cycle shown in
Figure 1.3. This shows customers generating demands, with operations using resources to make
products that satisfy them. Logistics moves materials around this cycle.

The operations are usually divided into a number of related parts, in the way that a hospital has
an emergency room, surgical ward, purchasing department, heart unit, and operating unit and so

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on. So logistics also moves materials through the different parts of an organization, collecting
from internal suppliers and delivering to internal customers (as shown in Figure 1.4).

This leads to our basic definition,

LOGISTICS is the function responsible for the flow of materials from suppliers into an
organization, through operations within the organization, and then out to customers.

LOGISTCS is the management of the flow of resource between the points of origin to the point
of consumption to meet some requirements. Logistics is the flow of material, information, and
money between consumers and suppliers. Logistics is a process of managing and coordinating
the flow of materials and information within the company and with its partners.

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Moving materials into the organization from suppliers is called inbound or inward logistics;
moving materials out to customers is outbound or outward logistics; moving materials within
the organization is materials management.

1.1.1. Materials
In these definitions we have talked about the movement of materials – but what exactly do we
mean by materials? Sometimes this is obvious when, for example, a power station brings coal
from a mine, a farmer moves potatoes to a wholesaler, or a computer manufacturer delivers PCs
to a warehouse. At other times it is less clear when, for example, a television company delivers
entertainment to its viewers, a telephone company provides a communications service or a
research company creates new knowledge.

Tangible goods clearly have to be moved, and you can easily see the role of logistics. Even
organizations providing the most intangible services move some goods around – perhaps
paperwork or consumables – so they still need logistics. Then a television company uses logistics
to move around its production facilities, and also to transmit programmers to customers. In
different circumstances, logistics is responsible for moving raw materials, components, finished
products, people, information, paperwork, messages, knowledge, consumables, energy, money
and anything else needed by operations. To simplify things, we describe all of these as materials

are all the things that an organization moves to create its products. These materials can be both
tangible (such as raw materials) and intangible (such as information).

1.2 The Supply Chain

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So far, we have focused on the movement of materials through a single organization. In reality,
organizations do not work in isolation, but each one acts as a customer when it buys materials
from its own suppliers, and then it acts as a supplier when it delivers materials to its own
customers. A wholesaler, for example, acts as a customer when buying goods from
manufacturers, and then as a supplier when selling goods to retail shops. A component maker
buys raw materials from its suppliers, assembles these into components, and passes the results to
other manufacturers. Most products move through a series of organizations as they travel
between original suppliers and final customers. Milk moves through a farm, tanker collection,
dairy, bottling plant, distributor, and supermarket before we buy it. A toothbrush starts its
journey with a company extracting crude oil, and then it passes through pipelines, refineries,
chemical works, plastics companies, manufacturers, importers, wholesalers and retailers before
finishing in your bathroom. A sheet of paper moves through several organizations before it
reaches our desk (illustrated in Figure 1.5).

People use different names for these chains of activities and organizations. When they emphasize
the operations, they refer to the process; when they emphasize marketing, they call it a logistics
channel; when they look at the value added, they call it a value chain, when they see how
customer demands are satisfied, they call it a demand chain. Here we are emphasizing the
movement of materials and will use the most general term of supply chain.

ASUPPLY CHAIN consists of the series of activities and organizations that materials move
through on their journey from initial suppliers to final customers.

Every product has its own unique supply chain, and these can be both long and complicated. The
supply chain for Cadbury starts with cocoa beans growing on farms and ends with the delivery of
bars of chocolate to hungry customers. The supply chain for Levi jeans starts with cotton
growing in a field and ends when you buy the jeans in a shop. The supply chain describes the
total journey of materials as they move ‘from dirt to dirt’.

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Along this journey, materials may move through raw materials suppliers, manufacturers,
finishing operations, logistics centers, warehouses, third party operators, transport companies,
wholesalers, retailers, and a whole range of other operations. Sometimes, the supply chain goes
beyond the final customer to add recycling and re-use of materials.

1.2.1. Structure of the supply chain

The simplest view of a supply chain has a single product moving through a series of
organizations, each of which somehow adds value to the product. Taking one organization’s
point of view, activities in front of it moving materials inwards are called upstream; those after
the organization moving materials outwards are called downstream.

The upstream activities are divided into tiers of suppliers. A supplier that sends materials directly
to the operations is a first tier supplier; one that send materials to a first tier supplier is a second
tier supplier; one that sends materials to a second tier supplier is a third tier supplier, and so on
back to the original sources. Customers are also divided into tiers. One that gets a product

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directly from the operations is a first tier customer; one that gets a product from a first tier
customer is a second tier customer; one that get a product from a second tier customer is a third
tier customer, and so on to final customers (see Figure 1.6).

In practice, most organizations get materials from many different suppliers, and sell products to
many different customers. Then the supply chain converges as raw materials move in

throug
h the tiers of suppliers, and diverges as products move out through tiers of customers. A
manufacturer might see sub-assembly providers as first tier suppliers, component makers as
second tier suppliers, materials suppliers as third tier suppliers, and so on. It might see
wholesalers as first tier customers, retailers as second tier customers, and end users as third tier
customers (as illustrated in Figure 1.7).

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It is fairly easy to imagine the shape of a manufacturer’s supply chain, but most other
organizations use the same general approach. Airlines, for example, move passengers from pick-
up points, through local feeder services to major ‘hub’ airports, on to another hub, and then back
out through local services to their destinations; banks collect all cheques in central clearing
houses before sending them back to branches and customers; blood transfusion services have
regional centers that act as wholesalers for plasma.

Supply chains diverge to meet demand from different types of customer. Manufacturers of car
components, for example, sell some products to car assembly plants, some to wholesalers for
garages doing repairs, some to retail shops for individual customers, and some directly to
customers through websites. Then the supply chain divides into separate strands with the same
product following alternative routes

1.2.2. Benefits of supply chains

Supply chains are so complicated that you might wonder if there is some way of avoiding them.
Sometimes this is possible, when we move products directly from initial producers to final
customers – when, for example, farm shops sell vegetables directly to consumers, or authors
publish their works on the Internet. In general, though, there are very good reasons for having a
longer supply chain. Suppose the population of a town decides to buy vegetables from a farm

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shop. This would have a minimal supply chain, but the whole population would travel separately
to the farm. It would make more sense to have a transport company collect the vegetables and
deliver them to a central location in the town – like a supermarket. If the transport company
delivers to one town, it can easily deliver to other nearby towns, perhaps stopping at a depot to
organize local deliveries. As there is a depot, vegetables can be put into storage while the supply
is plentiful, and removed when there are shortages. If the vegetables need cleaning or
preparation, the transport company can divert to a processing plant. Continuing in this way, you
can see why a long supply chain develops, and what benefits it brings.

Supply chains exist to overcome the gaps created when suppliers are some distance away from
customers. They allow for operations that are best done or can only be done at locations that are
distant from customers or sources of materials. For example, coffee beans grow in South
America, but the main customers are in Europe and North America. The best locations for power
stations are away from both their main customers in cities and their fuel supplies.

As well as moving materials between geographically separate operations, supply chains allow for
mismatches between supply and demand. The demand for sugar is more or less constant
throughout the year, but the supply varies with the harvesting of sugar cane and beet. When there
is excess supply, stocks are built-up in the supply chain, and these are used after the harvests
finish. Supply chains can also make movements a lot simpler. Imagine four factories directly
supplying products to eight customers (as shown in Figure 1.8). Logistics has to organize 32
different delivery routes but, if the factories use a central wholesaler, the number of routes is cut
to 12.

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The following list suggests some other benefits of well-designed supply chains (where we use the
terms ‘wholesaler’ and ‘retailer’ as a convenient label for intermediaries):

 Producers locate operations in the best locations, regardless of the locations of their
customers.
 By concentrating operations in large facilities, producers can get economies of scale.
 Producers do not keep large stocks of finished goods, as these are held further down the
supply chain nearer to customers.
 Wholesalers place large orders, and producers pass on lower unit costs in price discounts.
 Wholesalers keep stocks from many suppliers, giving retailers a choice of goods.
 Wholesalers are near to retailers and have short lead times.
 Retailers carry less stock as wholesalers provide reliable deliveries.
 Retailers can have small operations, giving a responsive service near to customers.
 Transport is simpler, with fewer, larger deliveries reducing costs.
 Organizations can develop expertise in specific types of operation

1.3. Activities of Logistics (logistics fields)

Logistics is responsible for the movement and storage of materials as they move through the
supply chain. But what activities does this include? If you follow some materials moving through
an organization, you can see that the following activities are normally included in logistics.

 Procurement or purchasing. The flow of materials through an organization is usually

initiated when procurement sends a purchase order to a supplier.

 Inward transport or traffic actually moves materials from suppliers to the organization’s
receiving area. This has to choose the type of transport (road, rail, air, and so on), find the
best transport operator, design a route, make sure that all safety and legal requirements are
met, get deliveries on time and at reasonable cost, and so on.

 Warehousing or stores moves materials into storage, and takes care of them until they are
needed. Many materials need special care, such as frozen food, drugs, alcohol in bond,
chemicals that emit fumes, animals, and dangerous goods. As well as making sure that
materials can be available quickly when needed, warehousing also makes sure that they
have the right conditions, treatment and packaging to keep them in good condition.

 Stock control sets the policies for inventory. It considers the materials to store, overall
investment, customer service, stock levels, order sizes, order timing and so on.

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  Order picking finds and removes materials from stores. Typically materials for a customer
order are located, identified, checked, removed from racks, consolidated into a single load,
wrapped and moved to a departure area for loading onto delivery vehicles.

 Materials handling moves materials through the operations within an organization. It

moves materials from one operation to the next, and also moves materials picked from
stores to the point where they are needed.

 Outward transport takes materials from the departure area and delivers them to customers
(with concerns that are similar to inward transport).

 Physical distribution management is a general term for the activities that deliver finished
goods to customers, including outward transport. It is often aligned with marketing and
forms an important link with downstream activities.

 Recycling, returns and waste disposal. Even when products have been delivered to
customers, the work of logistics may not be finished. There might, for example, be
problems with delivered materials – perhaps they were faulty, or too many were delivered,
or they were the wrong type – and they have to be collected and brought back.

 Location. Some of the logistics activities can be done in different locations. Stocks of
finished goods, for example, can be held at the end of production, moved to nearby
warehouses, put into stores nearer to customers, passed on to be managed by other
organizations, or a range of alternatives. Logistics has to find the best locations for these
activities or at least play a significant role in the decisions. It also considers related
questions about the size and number of facilities. These are important decisions that affect
the overall design of the supply chain.

 Communication. Alongside the physical flow of materials is the associated flow of

information. This links all parts of the supply chain, passing information about products,
customer demand, materials to be moved, timing, stock levels, availability, problems, costs,
service levels, and so on.

1.4. Aims of Logistics

Logistics is responsible for the flow of materials through a supply chain. This function is also
called supply chain management. Some people argue that logistics is somewhat narrower and
concentrates on the movement within a single organization, while supply chain management
takes a broader view of movement through related organizations. This is, however, largely an
argument over semantics rather than real differences in practice. Here we will stick to the
convention that the two terms refer to exactly the same function. This view is supported by the
Institute of Logistics and Transport – the main professional body within the UK – who give the
following dentitions.

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Logistics is the time-related positioning of resources, or the strategic management of the total
supply-chain. The supply-chain is a sequence of events intended to satisfy a customer. Some
people also talk about logistics management, business logistics, distribution management,
materials management, merchandising, or a series of other terms. Sometimes you have to be
careful as these terms can refer to specific parts of the supply chain or slightly different activities.
When someone talks about, say, ‘distribution management’ you should be clear about whether
they mean transport, physical distribution, the whole of logistics, or some other function.

With our broad view, logistics managers have two main aims. The first is to move materials into,
though, and out of their own organization as efficiently as possible. The second aim is to
contribute to an efficient flow through the whole supply chain. Traditionally, managers
concentrate on the first of these, focusing on those parts of the supply chain that they directly
control. Hopefully, if each organization looks after its own logistics properly, materials will
move efficiently through the whole chain, thus achieving the second aim.

We have said that managers aim for an efficient movement of materials – but what exactly do we
mean by ‘efficient’? Efficient means producing the required amount of output by using the
available inputs or producing maximum amount of output by using the available amount of
input. There are several answers to this, including fast deliveries, low costs, little wastage, quick
response, high productivity, low stocks, no damage, few mistakes, high staff morale, and so on.
Although these are all worthy goals, they are really indicators rather than real aims. To find the
real aim of logistics, we must relate it to the wider objectives of the organization.

Ultimately, the success of every organization depends on customer satisfaction. If it does not
satisfy customers, it is unlikely to survive in the long term, let alone make a profit, have high
return on assets, add shareholder value, or achieve any other measure of success. So
organizations must deliver products that satisfy customers. Unfortunately, customers judge
products by a whole series of factors. When you buy a DVD, for example, you judge its contents,
appearance, how easy it is to buy, how long you wait, how expensive it is, whether the right
DVD was delivered, whether it was damaged, how courteously you were treated by sales staff,
and so on. Some of these factors clearly depend on logistics the availability of the DVD depends
on stocks; the delivery time depends on transport; damage is prevented by good material
handling; the price is affected by logistics costs.

So we can phrase the overriding aim of logistics in terms of customer service. It has to organize
the movement of materials in the best way to achieve high customer satisfaction.

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The overall aim of logistics is to achieve high customer satisfaction. It must provide a high
quality service with low – or acceptable – costs.

We can phrase this balance in terms of perceived customer value. Logistics adds value by
making products available in the right place and at the right time. If a product is available at the
place it is needed, logistics is said to have added place utility; if it is delivered at the right time,
logistics has added time utility. Then we can phrase the aim of logistics in terms of getting the
highest customer utility or perceived value. In essence, we are trying to maximize the difference
between perceived value and actual costs.

1.5. Importance of Logistics

Logistics is essential for every organization. Logistics has always been a central and essential
feature of all economic activity. There are few aspects of human activity that do not ultimately
depend on the flow of goods from point of origin to point of consumption. Without logistics, no
materials move, no operations can be done, no products are delivered, and no customers are
served.

Not only is logistics essential, but it is also expensive. Organizations may reduce their over-
heads as much as possible, but they are often left with surprisingly high logistics costs.
Unfortunately, it is difficult to put a figure to these, and there is a good deal of uncertainty in the
area. Normal accounting conventions do not separate expenditure on logistics from other
operating costs, and there is some disagreement about the activities to include. As a result, very
few organizations can put a precise figure on their logistics expenditure, and many have almost
no idea of the costs.

The cost of logistics varies widely between different industries. Building materials, such as sand
and gravel, have very high logistics costs compared with, say, jewellery, pharmaceuticals and
cosmetics. However, one rule of thumb suggests that logistics costs are 15–20 percent of
turnover (Accounting: The annual sales volume net of all discounts and sales taxes).

Chapter Two: An over view of Transportation Management

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 Learning Objectives

Upon completion of this chapter a student will be able to:

 Transport Decision Making

 Basic transport Economics & pricing

2.1. Definition,

Transportation is the operational area of logistics that geographically moves and positions
inventory. Because of its fundamental importance and visible cost, transportation has
traditionally received considerable managerial attention. Almost all enterprises big and small
have managers responsible for transportation.

From the logistical system viewpoint, three factors are fundamental to transportation
performance: (1) cost, (2) speed, and (3) consistency.

1. The cost of transport:- is the payment for shipment between two geographical locations and
the expenses related to maintaining in-transit inventory.

Logistical systems should utilize transportation that minimizes total system cost. This may mean
that the least expensive method of transportation may not result in the lowest total cost of
logistics.

2, Speed of transportation:- is the time required to complete a specific movement. Speed and
cost of transportation are related in two ways.

 First, transport firms, capable of offering faster service, typically charge higher rates.
 Second the faster the transportation service is, the shorter the time interval during which
inventory is in-transit and unavailable. Thus, a critical aspect of selecting the most desirable
method of transportation is to balance speed and cost of service.
3, Consistency of transportation:- refers to variations in time required to perform a specific
movement over a number of shipments.

If a shipment between two locations takes 3 days one time and 6 the next, the unexpected
variance can create serious supply chain operational problems. When transportation lacks
consistency, inventory safety stocks are required to protect against service breakdowns,
impacting both the sellers and buyers overall inventory commitment.

2.1.1. Role and types of transportation.

The role of transportation in logistics operations has changed dramatically over the last three
decades. Transportation enterprises provide two major services:

 Product movement and

 Product storage

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Product Movement: The primary transportation value proposition is product movement up and
down the supply chain. The performance of transportation is vital to procurement,
manufacturing, and market distribution. Transportation also plays a key role in the performance
of reverse logistics

Product Storage: A less visible aspect of transportation is product storage. While a product is in
a transportation vehicle, it is being stored.

Modes of Transportation

The freight transportation structure consists of the rights-of-way, vehicles, and carriers that
operate within five basic transportation modes. A mode identifies a basic transportation method
or form. The five basic transportation modes are:

i. Rail

ii. Highway ( road )

iii. Water

iv. Pipeline, and

v. Air

i. Rail Transportation

Early development of a comprehensive rail network connecting almost all cities and towns,
railroads dominated intercity freight tonnage until after World War II. This early superiority
resulted from the capability to transport large shipments economically and to offer frequent
service, which gave railroads a somewhat monopolistic position. However, with the advent of
serious motor carrier competition following World War II, the railroads' share of revenues and
ton miles declined.

The capability to efficiently transport large tonnage over long distances is the main reason
railroads continue to handle significant intercity tonnage.

Railroad operations have high fixed costs because of expensive equipment, right-of-way and
tracks, switching yards, and terminals. However, rail enjoys relatively low variable operating
costs. The development of diesel power reduced the railroads' variable cost per ton-mile, and
electrification is providing further reductions.

ii. Highway Transport: Highway transportation has expanded rapidly since the end of
World War II. To a significant degree the rapid growth of the motor carrier industry has
resulted from speed and ability to operate door-to-door.

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 Motor carriers have flexibility because they are able to operate on all types of roadways. Nearly
one million miles of highway are available to motor carriers, which is more mileage than all
other modes combined.

In comparison to railroads, motor carriers have relatively small fixed investment in terminal
facilities and operate using publicly financed and maintained roads.

iii. Water Transportation

Water is the oldest mode of transport. The original sailing vessels were replaced by steam-
powered boats in the early 1800s and by diesel in the 1920s. A distinction is generally made
between deep water and navigable inland water transport.

The main advantage of water transport is the capacity to transport extremely large shipments.
Water transport employs two types of vessels for movement: Deep water vessels are generally
designed for coastal, ocean, and great lakes transport; diesel towed boats generally operate on
rivers and canals and have considerably more flexibility.

Water transport ranks between rail and motor carrier in terms of fixed cost. Although water
carriers must develop and operate their own terminals, the right-of-way is developed and
maintained by the government and results in moderate fixed costs compared to rail. The main
disadvantages of water transport are the limited range of operation and transport speed.

Water transport will continue to be a viable transportation option in future logistical system. The
slow transit time of river transport provides a form of product storage in transit that can benefit
integrated logistics system design.

Unless the origin and destination of the movement are adjacent to a waterway, supplemental
transport by rail or truck is required. The capability of water to transport large tonnage at low
variable cost places this mode of transport in demand when low freight rates are desired and
speed of transit is a secondary consideration.

I. Pipeline

The basic nature of a pipeline is unique in comparison to any other mode of transport. Pipelines
operate on a 24-hour basis, 7 days per week and are limited only by commodity changeover and
maintenance. Unlike other modes, there is no empty container or vehicle that must be returned.
Pipelines have the highest fixed cost and lowest variable cost among transport modes. High fixed
costs result from the right-of-way for pipeline, construction and requirements for control stations,
and pumping capacity.

Since pipelines are not labor-intensive, the variable operating cost is extremely low once the
pipeline has been constructed. An obvious disadvantage is that pipelines are not flexible and are

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limited with respect to commodities that can be transported as only products in the forms of gas,
liquid, or slurry can be handled.

The main uses of pipelines are oil and gas together with the utilities of water and sewage. They
can also be used for a few other types of product such as pulverized coal in oil. Pipelines have
the advantage of moving large quantities over long distances. Unfortunately,they have the
disadvantages of being slow (typically moving at less than 10 km perhour), inflexible (only
transporting between fixed points), and only carrying large volumes of certain types of fluid. In
addition, there is the huge initial investment of building dedicated pipelines.

v. Air Transportation
The newest but least utilized mode of transportation is airfreight. The significant advantage of
airfreight lies in the speed with which a shipment can be transported. A coast-to-coast shipment
via air requires only a few hours contrasted to days with other modes of transport. While costly,
the speed of air transport allows other aspects of logistics such as field warehousing and
inventory to be reduced or eliminated.

2.2. Selection of Transportation

The problems of inadequate transportation service and uncertain transit times can cause a
company to hold several days more inventory than physical distribution plan falls for.This in turn
adds to the cost of carrying inventory and reduces the number of times that capital invested in
inventory can be turned over during the year, and the undesirable effects of poor customer
service and missed product promotions. Hence the selection of appropriate transportation modes
and maintenance of effort by physical distribution management are prerequisites for
accomplishing distribution objectives.

 The criteria for selecting the mode of transport vary and are elaborated below:
(a) Time Sensitive:

When the members of the channel stock less inventory or the customers follow just in time then
they tend to be time sensitive. Slower modes of transport cost less, may not guarantee to reach
on time. Hence, the organization must ensure that the choice of the mode guarantees the delivery
time each time.

Generally, if you do not care about the speed of delivery or you are less concerned with fast
delivery you can use slower transportation modalities like Sea transports in that they are less
costly and whenever you are in need of fast delivery use fastest modalities like plane/airways
though they are costly

(b) Cost:

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The cost factor has already been discussed as comprising of two parts visible costs and hidden
costs. These two need to be minimized but not compromising on the customer service.
Sometimes to balance the cost and service multiple modes of transport might have to be used.

(c) Capability:

This depends on the type of products that need to be moved. If the products are big then the
transport must be capable of carrying them (for example heavy machinery).

(d) Dependability:

Each time a distribution needs to be performed the mode must be available and each time they
must ensure the products reach the right place, at the right time without any damage.

(e) Frequency:

This refers to the number of times the goods are scheduled for movement. An oil pipeline is a
dedicated mode which is present continuously and can be used at any interval of time. To some
destinations frequency of flight is high.

2.3. Integrated Logistics

Integrated logistics refers to bringing of those related activities in to a single function or process
of logistics directed towards serving the customer effectively and at the lowest total cost all
functional activities taken together.

The integration of logistical activities can determine in to two ways:

1. Integration within the organization(internal integration) and

2. Integration within the supply chain(external integration)
1. Internal integration:-refers to making of all traditionally fragmented activities to work
together as a single function in order to compromise conflict of interest among each activity
within the enterprise.

To achieve better internal integration logistical activities need to be combined in three

operational areas:

a. Procurement
b. Manufacturing support
c. Physical distribution
A. Procurement:-concerned with purchasing and arranging materials, parts and/or finished
inventories

Activities of logistic in procurement:

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  Selection of supplier and negotiation
 Inbound transportation
 Inspection
B. Manufacturing support:-concentrate on managing work in process inventories as it flows
between storage of manufacturing. Here logistics participate in the design of master of
production scheduling and timely availabilities of materials.

Activities of logistics in manufacturing support:

 Packaging
 Storing and handling
 Inventory related tasks
C. Physical distribution:-represent movement of finished products to customers. In physical
distribution customer is the final destination of the market channel.

Activities of logistics in physical distribution:-

 Order processing
 Transportation
 Warehousing
 Return goods handling this is because of damage, repairement or change in customer
demand

2.3.1. Barriers to internal integration

1. Organization structure:-traditional organization structure prevents cross functional

collaboration. In traditional organization structure each department accomplish their task by their
own.
2. Measurement system: - each department separately measures their performance.
3. Inventory ownership: - for example production department need high inventory because by
producing large amount to minimize costs. In contrast inventory control needs low inventory to
easily control and manage the inventory.
4. Information technology: - information is the key source for both internal and external
integration. In traditional system there is no accessibility to get specific data base.
5. Knowledge transfer capability: - the level and ability of sharing experience between each
functional system. In traditional system there is no experience sharing, when the experienced
employee leave the work place (organization) by any reason the problem will rise in the
organization system.

2.3.2. Problems with fragmented logistics

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Figure 2.1 summarizes our view of logistics within an organization, where a series of related
activities add value to the final product. These activities have traditionally been managed
separately, so that an organization might have a distinct purchasing department, transport
department, warehouse, distribution fleet, and so on. Unfortunately, dividing up logistics in this
way creates a number of problems.

Purchasing might look for the most reliable suppliers, inventory control for low unit costs,
warehousing for fast stock turnover, materials management for easy handling, transport for full
vehicle loads, and so on. These aims all seem worthy, so it might be sensible for each activity to
judge its own performance in the most appropriate way. Unfortunately, we soon hit problems
when the aims come into conflict. For example, warehousing might save money by reducing the
stock of raw materials – but this leads to more frequent shortages and raises the costs of
expediting for purchasing and emergency deliveries for transport. Similarly, purchasing can
reduce its administrative costs by sending fewer, larger orders to suppliers – but this increases
stock levels and raises the amount of money tied up in the warehouse. Using sea transport rather
than airfreight reduces transport costs – but increases the amount of stock held in the supply
chain. In reality, the different activities of logistics are very closely related, and policies in one
part inevitably affect operations in another.

The problems at RP (receiving and picking consolidation) Turner are almost inevitable if
logistics is divided into separate functions. Each part will move in a different direction, and there
is duplicated effort and wasted resources. Imagine a wholesaler who has one fleet of vehicles run

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by materials management to bring materials in from suppliers, and a separate fleet run by
distribution to deliver the same goods out to customers. This might work, but you can picture the
duplicated effort and waste in managing two separate vehicle fleets. Another organization might
have three stocks – raw materials, work in progress and finished goods – each run by different
departments and using different standards and systems.

A fragmented supply chain also makes it difficult to co-ordinate the flow of information through
different systems. Suppose a production department knows that it is running short of a material
and needs a new delivery. This information should pass seamlessly to purchasing. If, however, it
has to pass from one system to another there is a greater chance of error, uncertainty, delay and
inefficiency – resulting in late delivery, emergency orders, expediting and shortages.

To put it briefly, fragmenting logistics into different parts has the disadvantages of:

 giving different, often conflicting, objectives within an organization

 duplicating effort and reducing productivity
 giving worse communications and information flows between the parts
 reducing co-ordination between the parts – leading to lower efficiency, higher costs and
worse customer service
 increasing uncertainty and delays along the supply chain
 making planning more difficult
 introducing unnecessary buffers between the parts, such as stocks of work in progress,
additional transport and administrative procedures
 obscuring important information, such as the total cost of logistics
 Giving logistics a low status within an organization.

2.3.3. Bringing activities together

The obvious way of avoiding these problems is to consider logistics not as a series of distinct
activities, but as a single integrated function. Then all the parts work together to get the best
overall result for the organization. A well designed, integrated logistics system is a vital
prerequisite for commercial success.

Integrating logistics within an organization has all the related activities working together as a
single function. This is responsible for all storage and movement of materials throughout the
organization. It tackles problems from the viewpoint of the whole organization, and looks for the
greatest overall benefit.

In practice, it is difficult to integrate all the logistics within an organization. The supply chain
consists of many different activities, with different types of operation, using different systems
and geographically dispersed. The usual approach has the integration developing over time. One
department might slowly take over all aspects of ordering and receiving raw materials. Another

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department might slowly take over all aspects of delivering finished products to customers. Some
organizations are tempted to stop when they reach this stage, and they work with two functions:

o Materials management, aligned with production and looking after the inwards flow of
raw materials and their movement through operations; and

o Physical distribution, aligned with marketing and looking at the outward flow of finished
goods.

However, this still leaves an artificial break in what is essentially a continuous function. The
obvious step is to combine the two into a single function responsible for all material movement
into, through and out of the organization. This completes the internal integration of an
organization’s logistics.

Despite the obvious benefits of integrated logistics, there can still be practical difficulties.
Perhaps the obvious one is finding someone with the knowledge, enthusiasm, ability and
authority to carry through necessary changes. This needs a senior manager who has the necessary
power to start the changes – with effects then percolating through all levels of the organization.
New practices and relationships come from individuals working together, developing a culture
that is based on teamwork and co-operation rather than self-interest and conflict.

Another factor that encourages internal integration is the analysis of total logistics cost. We can
define this as:

Total logistics cost = transport cost + warehouse cost + stock holding cost + packaging cost +
information processing cost + other logistics overheads

The traditional view considered each of these separate costs as independent, so reducing, say, the
transport cost automatically lowered the total cost.

2.4. Problems with fragmented supply chains

We have described the benefits of integrating logistics within an organization. Now we can
extend this argument, and suggest the same benefits for integrating logistics along more of the
supply chain.

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 If each organization only looks at its own operations, there are unnecessary boundaries between
them, disrupting the flow of materials and increasing costs. External integration removes these
boundaries to improve the whole chain. Christopher advises this move, saying that ‘Most
opportunities for cost reduction and/or value enhancement lie at the interface between supply
chain partners’.

This effectively gives three levels of integration. The first has logistics as separate activities
within an organization; the second has internal integration to bring them together into a single
function; the third has external integration, where organizations look beyond their own
operations and integrate more of the supply chain (as illustrated in Figure 2.2).

 Organizations within the same supply chain should CO-OPERATE to get final customer
satisfaction.

 They should not compete with each other, but with organizations in other supply chains.

Imagine a retailer who notices that demand for a product rises by 5 units in a week. When it is
time to place the next order, the retailer assumes that demand is rising, and orders ten extra units
to make sure it has enough. The local wholesaler sees demand rise by ten units, so it orders an
extra 15 units to meet the growth.

The regional wholesaler sees demand rise by 15 units, so it orders another 20 units. As this
movement travels through the supply chain, a relatively small change in final demand is
amplified into a major variation for early suppliers.

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2.5. Benefits of integration
Confederated Bottlers used to deliver bottles from their main plant in Elizabethville to a brewery
in Johnston, 115 miles away. The brewery filled the bottles and took them to a distribution center
20 miles outside Elizabethville. Both companies used their own trucks to deliver products,
returning empty. Eventually, they formed a joint transport company that used the same trucks for
both deliveries. Not surprisingly, the transport costs almost halved. This example shows one
obvious benefit of integration, but there are many others.

Any uncertainty in the supply chain – such as the amplified variation of demand seen in the last
example – encourages organizations to hold higher stocks to give themselves a margin of safety.
If you continue thinking along these lines, you find the following benefits from external
integration:

o genuine co-operation between all parts of the supply chain, with shared information and
resources
o lower costs – due to balanced operations, lower stocks, less expediting, economies of
scale, elimination of activities that waste time or do not add value, and so on
o improved material flow, with co-ordination giving faster and more reliable movements
o better customer service, with shorter lead times, faster deliveries and more customization
o more flexibility, with organizations reacting faster to changing conditions
o standardized procedures, becoming routine and well-practiced with less duplication of
effort, information, planning, and so on
o Reliable quality and fewer inspections, with integrated quality management
programmers.

2.6. Achieving Integration

 Co-operation and conflict

Normally, a supply chain consists of distinct organizations, each working for their own benefit.

The first problem with external integration is overcoming the traditional view of organizations as
adversaries. When an organization pays money to its suppliers, people assume that one can only
benefit at the expense of the other. If the organization gets a good deal, it automatically means
that the supplier is losing out: if the supplier makes a good profit, it means that the organization
pays too much. This adversarial attitude has major drawbacks. Suppliers set rigid conditions and,
as they have no guarantee of repeat business, they see no point in co-operation and try to make as
much profit from each sale as possible. At the same time, organizations have no loyalty, and they
shop around to get the best deal and remind suppliers of the competition. Each is concerned only
with their own objectives and will – when convenient to themselves – change specifications and
conditions at short notice. The result is uncertainty about the number and size of orders,

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constantly changing suppliers and customers, changing products and conditions, different times
between orders, no guarantee of repeat orders and changing costs.

To avoid these problems, organizations have to recognize that it is in their own long-term interest
to replace conflict by agreement. This often needs a major change of culture. The following table
suggests some specific adjustments.

2.6.1. Different types of co-operation

There are several ways that organizations can co-operate. They can, of course, simply do
business together.

If an organization has a good experience with a supplier, it will continue to use them and over
some period will develop a valuable working relationship. Sometimes the co- operation is more
positive, such as small companies making joint purchases to get the same quantity discounts as
larger companies; EDI (electronic data interchange) links to share information; combining loads
to reduce transport costs; agreed package sizes to ease material handling, lists of preferred
suppliers, and so on. The key point with these informal arrangements is that there is no
commitment. This is probably how you shop, as you have favorite shops but are not obliged to
use them. Japanese companies take this approach further forming Keiretsu– which are groups of
organizations that work together without actually forming partnerships.

An informal arrangement has the advantage of being flexible and non-binding. On the other
hand, it has the disadvantage that either party can end the co-operation without warning, and at
any time that suits them.

3. Strategic alliances

When an organization and a supplier are working well together, they may both feel that they are
getting the best possible results and neither could benefit from trading with other partners. Then

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they might look for a long-term relationship that will guarantee that their mutual benefits
continue. This is the basis of a strategic alliance or partnership.

The supplier knows that it has repeat business for a long time, and can invest in improvements to
products and operations; the organization knows that it has guaranteed – and continually
improving – supplies.

Supplier partnering is ‘an ongoing relationship between firms, which involves a commitment
over an extended time period, and a mutual sharing of information and the risks and rewards of
the relationship.’

The following list gives the main features of alliances:

 organizations working closely together at all levels

 senior managers and everyone in the organizations supporting the alliance
 long-term commitment
 shared information, expertise, planning and systems
 flexibility and willingness to solve shared problems
 continuous improvements in all aspects of operations
 joint development of products and processes
 guaranteed reliable and high quality goods and services
 agreement on costs and profits to give fair and competitive pricing
 Increasing business between partners.

Vertical integration

If an organization wants to go beyond partnerships, it has to own more of the supply chain. One
common arrangement has an organization taking a minority share in another company. This
gives it some say in their operations, but it does not necessarily control them. A manufacturer,
for example, might take a minority share in a wholesaler, to get some influence in the way that its
products are distributed.

Another option is for two organizations to start a joint venture, where they both put up funds to
start a third company with shared ownership. A manufacturer and supplier might together form a
transport company for moving materials between the two.

The most common arrangement has one organization simply buying other organizations in the
supply chain. This increases its level of vertical integration.

Vertical integration describes the amount of a supply chain that is owned by one organization.

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If an organization buys materials from outside suppliers and sells products to external customers,
it does not own much of the supply chain and has little vertical integration (as shown in Figure
2.5).

If the organization owns initial suppliers, does most of the value adding operations, and
distributes products through to final customers, it owns a lot of the supply chain and is highly
vertically integrated. If the organization owns a lot of the supply side it has backward or
upstream integration; if it owns a lot of the distribution network it has down- stream or forward
integration.

Special notes added to read by your self

About Just-In-Time (JIT) concept: What is the Just-In-Time concept? Since the emergence of
this term it was difficult for sciences and business people to define it. Just in Time (JIT)
production is a manufacturing philosophy which eliminates waste associated with time, labor,
and storage space. Basics of the concept are that the company produces only what is needed,
when it is needed and in the quantity that is needed. The company produces only what the
customer requests, to actual orders, not to forecast. JIT can also be defined as producing the
necessary units, with the required quality, in the necessary quantities, at the last safe moment. It
means that company can manage with their own resources and allocate them very easily.

Objective of JIT: JIT Manufacturing tries to smooth the flow of materials from the suppliers to
the customers, thereby increasing the speed of the manufacturing process.

The objectives of JIT are to change the manufacturing system gradually rather than drastically:

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 1. To be more responsive to customers,
2. To have better communication among departments and suppliers,
3. To be more flexible,
4. To achieve better quality,
5. To reduce product cost

Chapter Four: Marketing Channel Management

Learning Objectives

Upon completion of this chapter a student will be able to:

 Marketing Channel Concept

 Marketing Flows in Marketing Channel
 Analyzing Marketing Channel Structure
 Channel Management, Channel Relationship & Competitive Dynamics

Introduction

As you know, the primary objective of all business enterprises is to earn profit by selling goods
and services to ultimate consumers or users. In order to bring goods from the place of
manufacture to the place of consumers, the goods have to follow a path or route which is known
as channel of distribution or trade channel. The channel serves as a link between the producer
and consumers.

4.1. Meaning of Channel of distribution

A channel of distribution or trade channel is the path or route along which goods move from
producers to ultimate consumers or industrial users. In other words, it is the distribution network
through which a producer puts his product in the hands of actual users. The term middleman
refers to any institution or individual in the channel which either acquires title to the goods or
negotiates or sells in the capacity of an agent or broker. But facilitating agencies that perform or
assist in marketing function are not included as middlemen in the channel of distribution. This is
because they neither acquire title to the goods nor negotiate purchase or sale. Such facilitating
agencies include banks, railways, roadways, warehouses, insurance companies, advertising
agencies, etc.

The following diagram (chart) is illustrative of the channel of distribution which may exist in a
market.

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The above chart indicates that the number of middlemen may vary and alternative channels of
distribution. In the channel of distribution there may be more than one agent/dealer and
wholesaler or retailer.

4.2. Choice of a channel of distribution

The factors to be considered before choosing a suitable channel of distribution are listed below:

I. Product considerations: The nature and type of product have an important bearing on
the choice of distribution channels. For examples, perishable goods need speedy
movements and hence shorter channel or route of distribution; for durable goods, longer
and diversified channels may be used; similarly, for technical products requiring
specialized selling and serving talents, the shortest channel should be used.
II. Market considerations: The nature and type of customers and size of market are
important considerations in the choice of a channel of distribution. For example, if the
market size is large, there may be long channels, whereas in a small market direct selling
may be profitable. The nature and type of consumers include factors such as desire for
credit, preference for the stop shopping, demand for personal services, amount of time
and effort the customer is willing to spend. It also includes factors like age, income
group, sex, and religion of customers.
III. Company considerations: The nature, size and objectives of the business firm also play
an important role in the selection of distribution channel. It includes financial resources,
market standing, volume of production, desire for control of channel, services provided
by manufacturers', etc.

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 For example a company with substantial financial resources need not rely too much on
the middlemen and can afford to reduce the levels of distribution. Similarly a company
desiring to exercise greater control over channel will prefer a shorter channel.
IV. Middlemen considerations: The cost and efficiency of distribution depend largely on
the nature and type of middlemen. It includes characteristics of middlemen such as
availability, attitudes, services, sales potential, costs etc.

4.3. Marketing Channel Functions Performed by Intermediaries

a. Transactional Function

 Buying: - Purchasing products for resale or as an agent for supply of a product

 Selling: - Contracting potential customers, promoting products, and soliciting orders
 Risk Taking: - Assuming business risks in the ownership of inventory that can become
obsolete or deteriorate.
b. Logistical Function

o Assorting. Creating product assortments from several sources to serve customers

o Storing. Assembling and protecting products at a convenient location to offer better
customer service.
o Sorting. Purchasing in large quantities and breaking into smaller amounts desired by
customers.
o Transporting: Physically moving a product to customers.
c. Facilitating Function

o Financing. Extending credit to customers

o Grading. Inspecting, testing, or judging products, and assigning them quality grades
o Marketing information and research. Providing information to customers and
suppliers, including competitive conditions and trends.

4.4. Flows in Marketing Channels

One traditional framework that has been used to express the channel mechanism is the concept of
flow. It reflects the many linkages that tie channel members and other agencies together in the
distribution of goods and services. From the perspective of the channel manager, there are five
important flows:

1. Product flow

2. Negotiation flow

3. Ownership flow

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4. Information flow

5. Promotion flow

The product flow refers to the movement of the physical product from the manufacturer through
all the parties who take physical possession of the product until it reaches the ultimate consumer.
The negotiation flow encompasses institutions that are associated with the actual exchange
processes. The ownership flow: shows the movement of title through the channel. Information
flow identifies the individuals who participate in the flow of information either up or down the
channe1. Finally, the promotion flow refers to the flow of persuasive communication in the form
of advertising, personal selling, sales promotion, and public relations.

4.5. Types of Distribution within Channels

Once a channel is selected, the distribution strategy can take three different forms. They are
listed as follows, from most restrictive to least restrictive and remember, in retail, the term
“restrictive” does not automatically have a negative connotation.

1. Exclusive distribution is thought of most frequently for high-dollar products such as luxury
cars or Rolex watches, but the fact is that even small ticket items like toys are considered
exclusive when they are in high demand.

In an exclusive distribution agreement, one retail store or chain of stores has the legal right to
market and sell the product line in a geographic area. Exclusive distribution is sometimes
requested by the retailer, not the producer, to ensure that the retailer has something unique, that
customers can’t get anywhere else.

2. Selective distribution means the retailers are carefully screened, and only a few are permitted
to carry the product line.

3. Intensive distribution is the closest thing to blanket coverage in retail, a “you can find it
anywhere” theory of marketing.

Ironically, this intensive product availability requires a large and complex distribution channel in
order to cover all the sales outlets, from supermarkets and convenience stores to vending
machines and restaurants. Manufacturers of these products depend heavily on their wholesalers
to handle the sales functions and will drop a wholesaler who is not performing well based on
sales figures which makes this type of wholesaling very competitive.

4.6. Channel Relationships

The fact is that modern-day companies are often forced to participate in distribution channels for
practical reasons not really because they want to be “part of the team.” They need the efficiency

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and the economy of scale, although in some ways, this kind of cooperation runs counter to the
tough, competitive side of traditional retailing.

Channel cooperation would be ideal a joint effort of all the members to create a supply chain that
is flexible, gives each partner a competitive advantage, and ultimately provides the best product
and related services to the customer. However, whether you’re selling candy bars or luxury
automobiles, conflict does occur when the members of a distribution channel choose different
ways to operate within the system, have differing goals, or balk at sharing information. Areas of
potential channel conflict are many. They can arise naturally from competition between multiple
members of the same channel—retailers or wholesalers—who carry the same product line. They
will also occur when retailers have service issues with the products and want to handle returns,
repairs, or exchanges differently (say, more generously) than what the manufacturer is willing to
do. A very common source of channel conflict is a producer’s decision to either increase or
decrease prices. The wholesalers take the flack about it from retailers who, in turn, must listen to
consumers’ complaints, at least in the case of price hikes.

There is a hierarchy in all distribution channels, whether the participants like it or not. The
company that has the most authority in the channel is referred to as the channel leader or channel
captain. In this case, “authority” means the partner’s ability to either influence or control the
behavior of any of the other partners in the channel.

Strategic Alliances

A similar partnership arrangement between separate companies with products or skills to share is
the strategic alliance, which allows them to share the use of already-established distribution
channels in pursuit of business growth in new markets. Retailers have been forging strategic
alliances since the 1950s, and the pace continues unabated today as stores continue to branch into
international sales.

A strategic alliance is more than two companies holding shares of each others’ stock, or ordering
merchandise jointly for added buying power. In order to be truly strategic, the alliance must have
all three of the following characteristics:

1. It must be collaborative. It should not involve the stronger channel member barking orders to
the weaker one.

2. It must be horizontal. That is, it must be forged between companies of the same type, two
retailers or two wholesalers.

3. It must be beneficial to both. This requires common objectives and the willingness to
communicate and share knowledge.

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A promising collaboration would be the alliance of two similar types of retailers in two different
countries to share product lines, invest in technology together, and learn from each other.

Retailers commonly belong to several strategic alliances. They offer a way to share the risks of
business expansion that, if undertaken separately, the individual companies may lack the time,
money, or expertise to manage. To conclude, the channel generating the largest sales volume at
lower unit cost will be given top priority. This will minimize distribution cost.

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