Last updated: What is logistics: Definition, types, benefits

What is logistics: Definition, types, benefits

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The fact that in 2021 U.S. business logistics costs increased about 22% to $1.85 trillion should make it clear that logistics is a vital aspect of competing and winning in global markets increasingly driven by e-commerce and dependent on smooth-running supply chains.

Although some of the increases and pressure on supply chains were the direct result of the pandemic, the world suddenly felt the impact of logistics on nearly every aspect of life. With a shortage of just about everything, the supply chain became among the most talked about topics in in everyday life.

Businesses of all kinds felt the pinch of disrupted supply chains. For example, procurement logistics responsible for sourcing and purchasing materials to produce automobiles couldn’t enough semiconductors to finish the vehicles that required chips to operate onboard sensors and computers.

This disruption rippled throughout the industry. The shortage of microchips left production as well as sales and distribution without products to ship and sell. The always-full lots at dealerships quickly dwindled down to the few available new models. Soon even the used car market couldn’t keep up.

Today, brands across all industries are focused on improving their logistics management for business resilience and growth.

What is logistics?

Logistics is the overall process of planning and execution of how resources are acquired, stored, and transported from one point to another, such that they are delivered at the right place and at the right time while reducing overall operational costs. The goal of logistics management is to meet customer requirements in a timely, efficient, and cost-effective manner.

At first glance, logistics and supply chain may seem like the same thing. But logistics is the process used to manage and coordinate the supply chain across an interconnected collection of external companies, suppliers, and shipping operations as well as internal functions to ensure that materials and products are moved from Point A to Point B as efficiently as possible.

The process we know as logistics originated in military contexts. To win battles and ultimately wars, soldiers needed supplies produced or obtained and delivered on time and efficiently.

This concept, adapted to business operations, helps companies earn greater profits, reduce cost and waste, keep current customers, and win new business.

Prime examples of this include brick-and-mortar retailers like Walmart, manufacturers driven by assembly lines like General Motors, and, of course, e-commerce giants like Amazon.

These three examples require many of the same kinds of logistics management as well as different types of logistics to ensure that products get produced, sold, and delivered to customers.

What are the types of logistics?

There are three main types of logistics:

  1. Inbound
  2. Outbound
  3. Reverse

Inbound logistics coordinates the procurement and delivery of products, materials, and information as inputs into an organization such as a business. These things flow inward from outside sources, often other businesses, vendors, and contractors.

Outbound logistics manages movement of products out of a business to customers. Whether those delivery vehicles are planes, trains, and automobiles, or fiber optic cables or satellites, products and services go out through vast networks made of shipping channels, storage facilities, and last-mile delivery methods.

Then we have reverse logistics. After inbound logistics help get products made, and after outbound logistics gets those products into the hands of customers, sometimes the customer decides to return that product. Maybe it’s the wrong item, or it doesn’t fit, or it was damaged or defective. Or maybe there’s a recycling program.

This is when reverse logistics comes into play, getting items from customers back to the manufacturer or company that produced or sold it.

What are the various functions of logistics?

Let’s break down logistics into the many functions that make it such an essential part of any successful business. Ultimately, reducing costs and increasing efficiencies defines effective logistics, regardless of what form logistics takes.

  • Transportation management systems enable logisticians to optimize the planning and execution of the movement of materials and products flowing along both inbound transportation and outbound transportation channels.
  • Fleet management factors into effective transportation management for a company with its own vehicles. This means hiring, training, and managing drivers and possibly mechanics, and can include purchasing, maintaining, repairing, and replacing vehicles as well as planning and executing routes and schedules.
  • Warehousing and warehouse management play another important role in overall logistical success. Whether you’re bringing materials and information into the business or sending products and services out to customers, storage and warehousing are necessary in some form or another. That may mean actual warehouses and storage facilities or data centers for information storage and transmission.
  • Inventory management involves managing the purchase and storage of products and raw materials and balancing that with customer demand.
  • Demand planning and demand forecasting use many data sources and machine learning to anticipate demand trends among various customer segments. Using data-driven forecasting models, logistics teams plan for ebbs and flows in demand by increasing or decreasing the amounts of materials and products ordered and stored, factoring in inventory management data, consumer sentiment, economic conditions, and overall market trends and business plans.

Benefits of logistics management

Effective logistics management provides a range of business benefits, including:

  1. Visibility into supply chains
  2. Lower production costs
  3. Inventory and demand planning and forecasting
  4. Better customer experience
  5. Competitive edge

The savings and loss prevention produced by efficient logistics management reduces costs in part by reducing overhead and waste.

Greater efficiency and lower costs give the business a competitive edge by enabling investment in innovation and expansion into new markets as well as scaling production and distribution.

Improving products and managing a seamless and efficient supply chains—inbound, outbound, and reverse—goes a long way toward providing exceptional customer experience. Done right, logistics management ensures a business lives up to customer expectations and meets customer needs.

Managing a vast and integrated network of logistics functions increasingly requires that businesses embrace digital transformation and build in the right logistics management software to keep a step ahead of the competition.

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Frequently asked questions (FAQs):

Logistics is the management of the flow of goods and materials from their point of origin to their final destination. Logistics as a discipline encompasses key activities like transportation, warehousing, inventory management, packaging, and order fulfillment. The ultimate goal is for a business to deliver the right raw materials, goods, or finished products to the right location, at the right time, in optimal condition, and at the lowest cost. By coordinating activities such as supply chain management, route optimization, and materials handling, logistics aims to streamline operations, reduce costs, improve efficiency, and meet customer expectations.

1PL stands for First-Party Logistics. 1PL is a business process where a company manages all logistics activities in-house. This includes transportation, warehousing, and inventory management. The company owns all assets it will need to undertake the logistics business process, and bears the full cost and responsibility for its logistics operations. Example: grocery retailer Kroger, which owns and manages its distribution network.

2PL stands for Second-Party Logistics. 2PL involves a manufacturer or supplier providing basic logistics services like transportation or warehousing for another company. Unlike a 1PL, which manages all logistics from start to finish, a 2PL focuses on specific point-solutions like transportation or warehousing. Example: UPS Freight, a subsidiary of UPS provides transportation services, including truckload, less-than-truckload (LTL), and intermodal transportation.

3PL stands for Third-Party Logistics. 3PL is a business model when a highly specialized logistics service provider manages a range of logistics activities for a company. These activities can include transportation, warehousing, inventory management and order fulfillment. Example: GXO is a pure-play 3PL provider offering contract logistics services that manages outsourced supply chains and warehousing.

4PL stands for Fourth-Party Logistics. A pure-play 4PL service provider acts as a supply chain integrator. It assembles and manages various logistics resources, capabilities, and technologies, often coordinating the activities of multiple 3PLs. Example: Accenture, a global professional services company offers a wide range of services, including 4PL services to a variety of industries – including retail, manufacturing, and healthcare.

5PL stands for Fifth-Party Logistics. 5PL is a recent addition to the logistics industry. A 5PL company serves as a supply chain orchestrator, optimizing and harmonizing the functions of all parties involved in supporting a business’ logistics needs, including 3PL service providers. 5PL service providers typically don’t own any physical assets but use an advanced technology stack to provide end-to-end visibility and control. The 5PL approach gained momentum during the pandemic, particularly among ecommerce businesses venturing into global shipping for the first time and facing mounting challenges. Example: DHL Supply Chain, a division of DHL, offers 5PL services, encompassing supply chain fine-tuning, stockpile oversight, and transit coordination.

In a business setting, logistics is the backbone that connects various operational elements, from sourcing raw materials to delivering finished products to customers. It integrates multiple business processes like procurement, manufacturing, warehousing, and transportation to create a seamless flow of goods. The end goal is to maximize customer satisfaction by ensuring timely and cost-effective delivery, while also optimizing internal processes to reduce overhead and increase agility.

Integrated logistics is a unified approach to managing the flow of goods and services from suppliers to customers. It involves coordinating activities like transportation, warehousing, and inventory management to optimize the entire supply chain. Unlike traditional logistics, which often manages these activities in isolation, integrated logistics takes a holistic approach by breaking down silos. It leverages advanced technologies like intelligent ERP systems and IoT for real-time tracking and leverages cross-functional collaboration involving departments like sales, product management, procurement, and IT. The goal is to deliver products efficiently, reduce costs, and enhance customer satisfaction.

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