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A History of Logistics / Supply Chain Management

 

Logistics has always been a critical part as one of the 4 Ps in Marketing:
 
  • Product
  • Place
  • Price
  • Promotion

The Place component ensures the product is at the right place, at the right time, in the right quantity and the right quality.

"How the logistics discipline started and where it is headed ?"
 
Military Roots :
Logistics received recognition in military operations during World War II. It gained its momentum as it contributed to the effective distribution of machinery and supplies to troops. A service delivery failure here may mean an increase in unnecessary fatalities. Peter Drucker (a business guru in the 1960s) identified logistics as a growing concern within business. This generated more prominence towards the practice of logistics.

Deregulation of Transportation in USA :
As the economies in North America evolved in the 1970s and 1980s, transportation deregulation changed the competitive landscape of business. Carriers were free to charge their customers (Shippers) a competitive rate for their shipments.

Warehousing companies that typically acted as surplus inventory storage locations, married up with transportation companies to offer customers full-service solution capabilities. This formed the beginning of the 3rd party logistics business and paved the way for outsourcing logistical activities.

Globalization :
With the advent of globalization, firms began to seek

 

ways of cutting their production costs. Thus, multi-national corporations re-located their factors of production to low-wage countries to gain a competitive advantage.

Increasingly, more and more countries are joining the World Trade Organization (WTO) and opening their country to foreign capital investment (most recently in India and China).

Retail giants like WalMart exploit these new efficiencies and increase their imports from new emerging economies to reduce product prices in their stores. Thus, the new challenge is how to manage the product and information flows around the world. The increased pressure on managing these operations further underscored the importance of logistics as an area for optimization.

 

 

Information Technology :
Another contributor that led to an increased presence for logistics was the explosion in information technology and use of computers throughout the 1980s and onwards.

The cost of computing has decreased year after year since then and computing power rose exponentially. The use of the Internet and increased bandwidth capacity further enhanced and enabled quick connectivity and collaborative relationships that reduced inventories and created a Just-In-Time operating opportunity for organizations.

These efficiencies reduced errors, increased fill-rates and cut overall operating costs for organizations.

Supply Chain Management :
As the above factors fuelled efficiencies, logistics gained more prominence in organizations. A natural extension was to link the logistical operations from each firm to the entire supply chain.

The new paradigm became known as the systems approach to supply chain management and introduced the concept of trade-offs. In order to achieve least total supply chain cost, operational integration of the 5 main areas of logistics must be simultaneously optimized:

  • Warehousing
  • Transportation
  • Inventory
  • Order Processing and
  • Lot Quantities

Optimizing any one of these areas individually will sub-optimize the system as a whole.
For example, a single warehouse in a network would achieve the lowest warehousing cost. This would create high transportation costs as suppliers ship over greater distances to ship products into the warehouse and conversely, outbound to its market distribution area.
The addition of a second warehouse in the network would reduce transportation costs more than the marginal cost of operating the second warehouse, which would reduce total supply chain costs.

Future Challenges :

 

As the business landscape constantly changes with mergers & acquisitions and as globalization grows, there are corresponding changes in the supply chain that need to be continuously optimized to ensure least total supply chain costs.

Radio Frequency Identification (RFID) and other technologies will continue to drive down inventories as better information is made available in a timely manner. Since supply chain activities cross over all functional

areas in an organization (such as Marketing, Finance and Human Resources), new metrics must be developed to track true supply chain costs and identify the impact on new costs as corporate strategies change.
Organizations that measure and benchmark these costs will have a sustainable competitive advantage going forward.

 

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