Journal of Business Research, vol.

3, 2001
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The Importance of Logistics Function in Organizations: An Overview

Fatema Begum* Abstract: Since industrial revolution to about 1930, main focus of companies was on their manufacturing techniques. During this era, manufacturers could afford to focus on production only because demand was assured. The period from approximately 1930 to 1950, focus of the companies was on promoting and distributing their products. The period from the 1950s till today, companies formed marketing departments, started to implement the marketing concept as they needed to pay attention to customer wants and needs. Customer service has become one of the most important non price competitive factors. According to author logistics decisions have a vital role to play in this regard through having control over storing and distribution of goods and services. Components of business logistic are physical distribution and materials management. Both theoretically and practically the area of logistics has been so far neglected specially in third world countries. The objective of this paper is to highlight the importance of logistics management in a business organization in relation to customer satisfaction through to cost minimization and quality service delivery. The context of Bangladesh has been taken as an empirical study. In addition to literature review relevant information have been collected from various business organizations of Dhaka City, Bangladesh.

1. INTRODUCTION "Business logistics is the systematic and coordinated set of activities required to provide the physical movement and storage of goods (raw materials, parts, finished goods) from vendor /supply source through company facilities to the customer (market) and the associated activities including packaging, order processing, and others, in an effective manner necessary to enable the organization to contribute to explicit goals of the company." "Logistics research is primarily a development from the business discipline of marketing, management and engineering. Theory development (early 1900s) in the discipline of business was founded in economics. The concept of "utility" was first borrowed to justify the existence of marketing at a time when it was being criticized as a needless waste of resources. Marketing scholars attempted to disregard criticism of the discipline by presenting the notion that marketing creates time, place and possession utilities, which add value for customers. That concept was later borrowed by logistics researchers to justify the importance of the logistics discipline." (Stock, 1997: 515-539). The traditional functions of movement and storage are the focal points of activity in the logistics area. The application of the systems approach to decision making in the various sub functions of traffic, transportation, inventory management, warehousing, packaging, order processing, materials handling and in other areas of business is the new dimension of logistics. An increasing number of companies, from well-established basic manufacturing firms to consumer products companies to high-tech businesses to service companies, are recognizing the profitability potential available from a logistics approach. _______________________
*

Assistant Professor, Department of Business Administration, Jahangimagar University, Dhaka.

The Importance of Logistics Function in Organizations

2. THE EVOLUTION OF LOGISTICS IN FUNCTIONAL AREAS OF AN ORGANIZATION The evolution of logistics and growing importance of this area came along with industrial revolution and industrial development of U.S. economy. The origin of business logistics is found in military logistics during World War II. In earlier stages, emphasis of companies was upon production as whatever produced could be sold. All efforts related to organizational principles and technological developments were applied in the area of production. Later, mass production seemed to be efficient but the large corporation became more sensitive to changing economic conditions and sought growth and less competitive market situations. Efficient management team and administrative ability became the focus of interest. But product approach could no longer sustain as market had not been able to absorb the increased output. Marketing efforts were necessary to maintain or expand competitive positions for which distribution of goods and services became important concern. It was becoming increasingly difficult to keep the flow of products moving efficiently from the end of the manufacturing line to the consumer. Business became concerned about distribution. In the early part of the distribution stage, the warehousing of stocks at different points to meet sales needs became more popular. But even warehousing did not always place goods where they were most needed. Due to growing number of consumers of different cultures, rapid changes in tastes, styles and technological development led to variations in color, packing, and other features in a great number of lines of consumer goods as well as industrial goods. The growth and change in product-line characteristics implied that manufacturers had more items to make and distribution systems had more items to handle and stock. This meant lower volume per item and higher unit handling and inventory costs. Due to shorter life cycles of products, the ability to `fast track' product development, manufacturing and logistics becomes a key element of competitive strategy. Production planning became increasingly difficult because of the variation of products. This situation resulted in shorter production runs of each type and made economies of scale difficult to achieve. It also made liaison between production and marketing more important because total demand as input information was no longer acceptable since effective control necessitated knowing something about colors, models, and so forth. This made a strong case for someone or groups to control the physical supply of such items and act as a "go-between" for production and marketing. Higher valued products resulted in higher transportation cost and also increased inventory cost because of the larger amount of money invested in inventory. All the factors mentioned above related to cost in areas of logistics brought to the attention of many firms and became concerned for reducing such cost to have more effective controls. It became increasingly apparent that there was a relationship between these elements of transportation, inventory, warehousing, and other areas that could be exploited in terms of reducing cost. Two other areas contributed to the emergence of logistics. First, incorporation of quantitative analysis in the logistic area because of the emphasis upon cost. Second, the computer enabled people in the logistics area to analyze problems, which were complex

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in terms of the number of variables that had to be handled. The computer has been particularly helpful in inventory control. 3. EVOLUATION OF LOGISTICS ORGANIZATIONS Three distinct stages have been recognized in evolution of the logistics organization. These include the following: Primary integration is the first stage of the logical structure in most companies and includes outbound transportation and field warehousing as its primary functional concerns. These two functions are coordinated in an attempt to strengthen the competitive position of a firm's product in the market by improving product availability and lowering either traffic or warehousing costs. In the functional integration stage order processing, customer service and inbound transportation are usually added to the earlier functions. At this stage logistics becomes concerned with controlling the costs of supplying production's needs for materials and serving customer demand. If total integration is achieved, all other aspects of logistics are bought under a logistics manager's control. These may include purchasing, planning, forecasting, and physical distribution engineering. The logistics manager can control all the costs associated with the logistics functions that is, the integration of materials management and physical distribution. 4. ELEMENTS OF LOGISTICS: ANALYSIS FROM SYSTEM PERSPECTIVE There is a need to analyze the elements of logistics for possible changes that would result in lower cost. Logistics is an area of management interest that requires the analysis of its elements from a system perspective. These are discussed below: First: Earlier it has been mentioned that logistics is composed of materials management (MM) and physical distribution (PD). The successful management of logistics in an organization requires the careful coordination and manipulation of both movement and storage. One of the important things on the physical distribution side is the transpire time between the moment when a customer decides to place an order for a product and the time that those goods are actually delivered in a satisfactory condition. On the other hand parts and service support, return goods handling, and salvage and scrap disposal, etc are indicative of every broad set of customer service activities being managed in companies producing consumer durables and /or industrial products. The division or classification of logistics into MM and PD is a very useful managerial or control perspective of the logistics activities in an organization. There are important differences and requirements in the movement and storage aspects of raw materials and finished products in a firm. Companies may find it convenient to view their logistics system from these two perspectives, and it is necessary to develop different management approaches for each may result. But close coordination between materials management and physical distribution is still essential in spite of such differences. Second: The logistics area may be classified into various cost centers or activity centers to viewing the logistics system. Frequent analysis of the logistics on the basis of activity

The Importance of Logistics Function in Organizations

centers will make possibility for reducing total logistics costs. Improved service will be occurred by trading off one of these activity centers against another. Third: The nodes are the established spatial points where the movement of goods is stopped for storage and/ or processing such as plants and warehouses of the organization. Links represents the transportation network connecting the nodes in the logistics system. The network can be made up of all the various modes of transportation (rail, motor, air, water, and pipelines) as well as combinations and variations. The complexity of a logistics system is often a direct relationship to the variety of time and distance relationships between the nodes and the links and the degree of regularity and predictability as well as the volume of the flow of goods entering, leaving, and within the system. The logistic channel can be simple or complex. There are systems with one node where suppliers and the plant to customers in one relatively small market area. There are also the large multiple -product firms with multiple plant and warehouse locations. The transportation networks of the latter are also quite complex including three or four different nodes and perhaps private as well as for - hire transportation. Both cost reduction and effective customer service can be ensured through efficient management of nodes and links. All three approaches or views of a logistics system are interrelated and they must be coordinated. 5. CUSTOMER SERVICE: THE VALUE ADVANTAGE AND THE PRODUCTIVITY ADVANTAGE

5.1. Logistics And Customer Service The source of competitive advantage are the ability of the organization to differentiate itself to the customer from other competitors and operating business at a lower cost and hence at a greater profit. Commercial success can be obtained either from a cost advantage or a value advantage or, ideally, both. The productivity advantage gives a lower cost profile and the value advantage gives the product or offering a differentiated values. A major source of competitive advantage may be obtained through effective logistics management The transition from volume-based growth to value based growth will require a much greater focus on managing the core processes. These core processes include such activities as new product development, supplier development, order fulfillment and customer management. The cost-effective management of these fundamental activities will provide competitive advantage over others. So the basis for competing in this new era will be
Competitive advantage = Product excellence x process excellence (Christopher, 1998)

The necessary condition for applying the marketing concept, marketers must cover three areas. These are to meet customer needs and wants, to achieve and maintain long-term profitability, and to integrate marketing with the other functions in the company. The emphasis of companies has to be on customer orientation approach. This approach is a management philosophy in which the customer is central to everything the company

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does. In an environment of dynamic and competitive business world price competition as well as nonprice competition is to be considered to ensure long term profitability. As a non price competitive factor, superior customer service in an organization can gain a value advantage in the marketplace which ultimately results in lower cost. The customer service can be defined in following ways: "Customer service is providing the right products in the right quantities at the right place at the right time." "Customer service is meeting the expectations of customers at a reasonable cost." "Customer service is a plan of action for accomplishing product delivery within established standards of quality, quantity, form, and time." The above-mentioned definitions of customer service establish the extent of positive relationship between logistics and customer service. Customers include other departments, intermediaries and ultimate users of goods and services. 5.2. Customer Service Factors Customer service may affect all areas within a firm. Here we are primarily concerned with customer logistics service, or those aspects of customer service under the control of the firm's logistics function. A study by Hutchinson and Stolle identified seven such factors of interest to the logistics manager: 1. Order-processing time is elapsed time from receipt of the customer's order until it is ready for assembly. 2. Order assembly time is required to prepare the order for shipment. 3. Delivery time is the time in transit to the customer. 4. Inventory reliability includes stockouts, back orders, percentage of demand filled, omission rate, percentage of order complete, and so on. 5. Order size constraint mentions order size and allowable order frequency. 6. Consolidation allowed is the ability to consolidate items from several locations into a single shipment. 7. Consistency is the range of variation occurring in each of the previous elements. 5.3. Customer Service Elements A general rule is that the higher the level of service provided the grater will be the revenue received relative to the competition, other factors being held constant. The level of logistics (customer) service provided is a basic product quality, similar to price and other physical characteristics. Following customer service elements are major sources of differentiation. 5.3.1. Time The time factor is usually viewed as order cycle time. The buyer usually regards the time dimension as lead time or replenishment time. The seller doesn't have control over leadtime. Basic elements of lead time are -order transmittal, order processing, order preparation, and order shipment. The seller can change lead time through manipulation of

The Importance of Logistics Function in Organizations

the elements offered to buyers. Direct control is possible in order transmittal and order processing stages with possibly limited control over order shipment. Order transmittal is associated with the time that elapses from the time the customer develops the order until the seller receives the order. Lead-time can be reduced through reductions in order transmittal time that may result in improved customer service and increased sales income. Order processing usually involves customer credit check, transferal of information to sales records, order transference to inventory area, and preparation of shipping documents. Many of these functions can occur simultaneously. The use of electronic data processing equipment can significantly reduce the information time for transferal functions, while automated materials handling systems can reduce the time for the physical phase of order processing. Order preparation involves the "picking" of the order and packaging the item for shipment along with all the appropriate checks. These systems can vary from a simple manual system to a very highly automated system. Consequently, the time can vary considerably. The costs and benefits of the alternatives have to be considered. Order shipment extends from the moment the order is placed upon the vehicle for movement until it is received and unloaded at the buyer's destination. It is usually difficult to measure and control order shipment time when for-hire carriage is used. Information from the carrier may be unreliable. If the for-hire carriage transit time is to be reduced, the seller must use a faster mode of transport with a corresponding increase in transportation cost. Direct control of transit time is possible with a private fleet. Modifications in all four areas mentioned above may be too costly. It is possible, therefore, to make cost modifications in one area and permit the others to operate at the existing level. The guarantee of a given lead time is one of the more important advancements in logistics management. But the concept of time, by itself, is rather insignificant without a consideration of dependability. 5.3.2. Dependability In many cases dependability is more important than time to a customer. Lead-time: more generally, dependability refers to the delivery of a customer's order with the type and quality of items ordered. Dependability of lead-time then has a direct impact upon the customer's inventory level and stock out costs. If the customer can be assured of a given level of lead-time, plus some tolerance, the seller has established a distinct differentiation for its product over that of its competitor. The seller that provides dependable lead-time permits the buyer to minimize the total cost of holding inventory, stock out, order processing, and production scheduling. Safe delivery of an order is the ultimate goal of any logistics system. If the goods arrive in a damaged condition (or are lost), the customer cannot make use of the goods as intended. Thus, unsafe delivery causes the buyer to incur higher inventory carrying costs or foregone profits or production.

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Also an unsafe delivery may cause the customer to incur the cost of filing a claim with the carrier and / or returning the damaged item to the seller for repair or credit. The seller will probably be aware of these two cost areas since it will be more or less directly involved in corrective actions. Correct orders: If the customer do not receive what was requested then company may face potential lose of sales or production. An improperly filled order necessitates a reorder by the customers, if the customer is not angered to the point of buying from another supplier. Also, if a customer who is an intermediary in the marketing channel experiences a stock out, the cost of the stock out (lost sales) has a direct impact on the seller. The two vital logistics areas in the order filling function are the communication of customer order information to the order filling area and the actual process of picking out of inventory the items ordered. Product identification must be simplified so that the chances for an order picker to make an error are reduced. The informal feedback will indicate obvious errors or problems. The informal monitoring does not give the accuracy and completeness necessary to effective decisions making regarding dependability. The formal feedback method usually involves some mechanism, possibly a short questionnaire or a response card that obtains the desired information regarding time, safety, and order filling dependability. 5.3.3. Communication Without customer contact, logistics manager is unable to provide the most efficient and economical service. The communication must be a two- way process. The seller must be capable of transmitting vital logistics service information to the customer. 5.4. INFIRM ACTIVITIES AND ECONOMIC ACTIVITIES Logistics contributes to customer service by influencing both infirm activities and economic activities. Customers include internal customers (other departments), intermediaries and ultimate users. Infirm Activities If efficiency is measured by cost, then an individual part of the system may not be operating at its lowest cost by not contributing to the overall efficiency of the system. The general doctrine of the systems concept is to focus on how they interact as a whole. At the same time, however, logistics is one subsystem in the firm, and therefore it should not be optimized at the expense of another area in the firm. Thus logistics does not become submissive to marketing or finance in the performance and establishment to customer service levels. At the same time, logistics must work closely with other departments in the establishment of customer service levels so that the firm as a whole is benefited. Economic Activities Logistics management can add value to goods by creating place utility, time utility, form utility and possession utility. The role of logistics is evaluated below with respect to value addition to products for customers.

The Importance of Logistics Function in Organizations

Place utility: Logistics extends the physical addition to the economic value of the goods or services by movement from points of excess to points of demand are known as place utility. Place utility is primarily created through transportation. But to maintain this utility, warehouses may have a significant role to play. Time utility: Goods and services must also be available at that point when they are demanded. This is called time utility or the economic value added to a good or service by having it at a demand point at the time desired. Time utility is created through proper inventory maintenance and the strategic location of goods and location of goods and services. Transportation may also play a role in time utility creation by faster movement of something to a point of demand. An example of this concept is the addition of time utility by using air transportation as a substitute for warehousing. Possession utility: Promotion may be defined as the effort, through direct and indirect contact with the customer, to increase the desire to possess a good or benefit from a service. Promotion is concerned with the creation of possession utility. Relevant to the creation of utility in goods, the manager is able to have direct control over the customer's service variables for which logistics is held responsible. In addition, there are other dimensions of the relationships of logistics in the economy. One very important contribution is the volume and variety of goods available to consumers in areas far remove from where they are produced. Also, logistics system contribute to lower prices for goods. They enable firms to extend their markets in time and space, thereby reducing production costs. Logistics also affects other aspects of our economic system; for example, the transportation segment often has an effect upon land values when technical improvements occur. When a new interstate highway is built in an area, land values near the highway usually go up because it becomes more accessible to other areas of such highway facilities. 6. ORGANIZATIONAL PROBLEMS In an attempt to implement a logistics organization, the first major problem that may be arisen is resistance from existing departments. The problem arises because, despite the fact that interest in logistics is a relatively recent occurrence, logistics activities have always existed and have been handled by the traditional departments of a business. The second major problem is the dispute among the departments as to what activities is the lawful area of logistics. Another problem that is the criteria used to judge the performance of managers are often insufficient. Traditional reward systems are often based on the optimization of a single, smaller function regardless of the effect this has on the cooperation as whole. The criteria of successful job performance have to be changed so those managers will approach decision making with an overall corporate- goal perspective instead of a narrow, functional perspective.

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7. LOGISTICS IN THIRDWORLD COUNTRIES This literature has been adapted from "Transfer of Logistics Knowledge to Third World Countries" (Annexure-3) (Dadzie, Kofile Q,1998). In this literature the adequacy of logistics within the context of the third world business environment is evaluated. One of the most remarkable characteristics of the third world countries' industrialization efforts have been their strong reliance on the management knowledge of the industrialized nations. As many of these countries experience economic progress and industrialization, they have become increasingly aware of the importance of managerial skills and competence for their national development programs. This growing recognition has led to a rapid increase in the demand for business management schools. This increased demand has often led to the local establishment of business schools modeled on those in the USA and other industrialized countries. In addition, many government agencies in third world countries send their nationals to business schools in those countries. Despite differences in population size and levels of economic development, third world countries share a number of common characteristics. In addition, many of these countries' economies reflect a sellers' market environment and governments exercise strong controls over economic and business activities in these countries. Finally, management students in third world countries often do not have an "industrial mind set" and usually get their first exposure to business concepts and techniques in business schools. This provides a great impact on logistics practice and education in third world countries. Customer service issues frequently present the most overwhelming problems for logistics managers and consultant in the third world. The main task is to define customer service in measures that are valid for the third world country. In the USA and other industrialized nations, customer service is measured using a framework that assumes a buyer's market environment. In the third world, economic scarcity and the prevalence of a sellers' market environment makes this framework invalid. Under seller's market conditions, many anxious distributors for resale at much higher prices buy whatever is placed on the market. The chronic shortage of foreign exchange and its rationing implies that replenishment rates are nearly always less than optimal. Traders and manufacturers find it unnecessary to keep stock. The meaningful measures of customer service would pertain to de-marketing and personal trust. A transport and network configuration problem is another problem that the third world professionals are confronting. The optimal service cost logistics system is not valid in many third world countries because of the extensive nature of govt. control of business and marketing activity including logistics activities. Adding to these transport and network design problems is the existing transport infrastructure. Constructed during the period of colonial rule the infrastructure still maintains its "export" orientation. Consequently, inter-country links are inadequate, making access to new inland markets more difficult and more costly.

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The Importance of Logistics Function in Organizations

Another factor is the general delay in loading and unloading at third world ports. Often a combination of factors such as port congestion, strikes, revolutions and government reaction to these events combine to cause these delays. In addition to these, it is rarely possible in the third world to maintain higher level of inventory because foreign currency is frequently in short supplied and must be rationed. The differences between the third world and industrialized countries create considerable problems for educators as well. These problems may be classified into two categories: resource inadequacy and problems with the discipline's framework. 7.1. Resource Inadequacy Schools in the third world are modeled on those in the industrialized countries. In logistics education the curricula, course content, texts and cases are similar to those of us business schools. Often the textbook must be imported from the industrialized countries. Given the chronic problem of foreign currency shortage, supplying these texts and materials becomes a major problem in instructing the third world students. Additionally, it was observed that texts and periodicals were both outdated and acutely inadequate. 7.2. Organizing Framework The second educational problem derives from the discipline emphasis on total cost customer service framework. The extensive government control of business activities, including distribution and the prevalence of economic scarcity creates problems of credibility for the educator when text materials do not correspond with the third world country's reality. 8. EXPERIENCES IN BANGLADESH Bangladesh is a member of third world countries. An investigation was made to know the role and positioning of logistics management in business education and business practice. 8.1. Methodlogy For information of education system published syllabuses of different universities have been reviewed. A survey has been conducted on 22 companies in this regard through a structured questionnaire. They are both local market oriented and export oriented business organization. All selected respondents are leading companies of the country The companies include textile sector, garments industry, pharmaceuticals companies, software and hardware development companies, major group of companies, public utility service organization, automobiles and some other private business houses. They were asked about the positioning of logistics function among their functional areas. 8.2. Findings All companies deal with all logistics activities regularly. The survey result shows that among twenty-two representative companies, only 4 companies have separate area of logistics management. The remaining 18 companies do not recognize that logistics management needs to have a separate area like other functional areas. So it can be opined

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that the area of logistics management is not well recognized in Bangladesh. All the activities related with logistics are either distributed among various divisions, or within the production department or within marketing department. The efficient management of logistics is not possible until and unless it gets separate status. Managers responsible for these activities have to be acknowledged in their areas in order to minimize logistics cost and maximize customer service. The success of marketing involves customer satisfaction to have a competitive advantage which can provide productivity advantage and value advantage. Effective logistics control can play a significant role in this context. Theoretically, this area is almost ignored. In most of the cases students learn logistics as a part of production management and to some extent as a part of marketing. This has an obvious impact on business practices. So for effective planning this function must have integration with other functional areas of business within international perspective. 9. CONCLUSION The scope of logistics spans the organization, from the management of raw materials through to the delivery of the final product. Logistics Management has the potential to assist the organization in the achievement of both a productivity advantage and a value advantage. Effective management of logistics can provide better customer service which reduces cost, increases productivity and adds value to business. In the area of logistics management, the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and affects long term profitability. Its vital impact in the achievement of competitive advantage has been recognized by business organizations only in the recent past. In third world countries, this area is more neglected both theoretically and practically. As it can play a vital role in minimization of cost and maximization of customer service, attention should be considered about positioning of logistics management in theory and practice.
References 1. Coyle, John J. And Bardi, Edward J. (1984). The Management of Business Logistics. 2. Stock, James (1997). Applying Theories from other Disciplines to Logistics. Vol. 27, No. 9/10. 515-539. 3. Dadzie, Kofile (1998). Transfer of Logistics Knowledge to Third World Countries (Annexure 3). International Journal of Physical Distribution and Logistics Management. Vol. 28, No. 4. 272283. 4. Martin, Christopher (1998). Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Services. 5. Dilworth, James B. (1993). Production and Operations Management. 5t h Edition. McGrawHill. 6. Adam, Everett E., and Ebert Jr. Ronald J. (1995). Production and Operations Management. 5` h Edition. Prentice Hall. 7. Stevenson, William J. (1996). Production and Operations Management. 5t h Edition. Irwin, McGrawHill. 8. Lambert, Douglas M., and Stock, James R. (1999). Stategic Logistics Management. 3` d Edition. Irwin, McGraw-Hill.