What is Logistics and Supply Chain Management?
What is the difference between Logistics and Supply Chain Management? Many people use 2 terms interchangeably but what is the relationship between both terms? Here you will learn about the meanings of most common logistics and supply chain management terms.
What is Logistics and Supply Chain Management?
“Logistics typically refers to activities that occur within the boundaries of a single organization and Supply Chain refers to networks of companies that work together and coordinate their actions to deliver a product to market. Also, traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply Chain Management (SCM) acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service” – Michael Hugos
What is Logistics?
“Logistics is about getting the right product, to the right customer, in the right quantity, in the right condition, at the right place, at the right time, and at the right cost (the 7 Rs)” – John J. Coyle et al
In the past, various tasks were under different departments, but now they are under the same department and report to the same head as below,
What is Logistics Management?
“Logistics Management deals with the efficient and effective management of day-to-day activity in producing the company’s finished goods and services” – Paul Schönsleben
What is Supply Chain?
“Supply Chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer” – Martin Christopher
What is Supply Chain Management?
Each researcher defines supply chain management differently. However, we would like to provide the simple definition as below,
“Supply Chain Management (SCM) refers to the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served” -Michael Hugos
What is the Difference Between Inbound and Outbound Logistics?
“Inbound Logistics refers to movement of goods and raw materials from suppliers to your company. In contrast, Outbound Logistics refers to movement of finished goods from your company to customers”
To illustrate this term, we make a small graphic as below,
As you can see, purchasing and warehouse (distribution center) communicates with suppliers and sometimes called “supplier facing function”. Production planning and inventory control function is the center point of this chart. Customer service and transport function communicates with customers and sometimes called “customer-facing functions.
What is Transport and Logistics?
“Transport and Logistics refers to 2 types of activities, namely, traditional services such as air/sea/land transportation, warehousing, customs clearance and value-added services which including information technology and consulting”
What is International Logistics?
These are one of the most ambiguous groups of terms in international business out there. They are used interchangeably with international supply chain or international production and transportation activities. However, the most concise definition is as below,
“International Logistics focuses on how to manage and control overseas activities effectively as a single business unit. Therefore, companies should try to harness the value of overseas product, services, marketing, R&D and turn them into competitive advantage”
What is Third Party Logistics or 3PL?
The concept of 3PL appeared on the scene in the 1980s as the way to reduce costs and improve services which can be defined as below,
“Third Party Logistics or 3PL refers to the outsourcing of activities, ranging from a specific task, such as trucking or marine cargo transport to broader activities serving the whole supply chain such as inventory management, order processing and consulting.”
In the past, many 3PL providers didn’t have adequate expertise to operate in complex supply chain structure and process. The result was the inception of another concept.
What is Fourth Party Logistics or 4PL?
The 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,
“Fourth Party Logistics or 4PL refers to a party who works on behalf of the client to do contract negotiations and management of performance of 3PL providers, including the design of the whole supply chain network and control of day-to-day operations”
You may wonder if a 4PL provider is really needed. According to the research by Nezar Al-Mugren from the University of Wisconsin-Stout, the top 3 reasons why customers would like to use 4PL providers are as below,
– Lack of technology to integrate supply chain processes
– The increase in operating complexities
– The sharp increase of the operations in the global supply chains
What is Supply Chain Network?
Many companies have the department that controls supply chain activity so they believe that SCM is a “function”. Some companies think SCM is a kind of management system under IT (information system or enterprise resource planning.) In fact, SCM is actually a “network” consists of many players as below,
A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer (it’s more complex in the real world but a simple illustration serves the purpose.)
The word “management” can be explained briefly as “planning, implementing, controlling”. Supply Chain Management (in supply chain education context) is then the planning, implementing and controlling the networks.
What is Information Sharing?
Another important attribute of supply chain management is the flow of material, information, and finance (these are thing that can be found in lean manufacturing and six sigma project too). Even though there are 3 types of flow, the most important one is information flow aka information sharing. Let’s see the example of this through the simplified version of the bullwhip effect as below,
When customer demand data is not shared, each player in the same supply chain must make some sort of speculation and this can become the management issues. According to the above graphic, the retailer has a demand for 100 units, but each player tends to keep stock more and more at every step of the way. This results in higher costs for everyone in the same supply chain.
When information is shared via demand management from retailer down to supplier, everyone doesn’t have to keep stock that much. The result is a lower cost for everyone. This is sometimes called the extended supply chain or supply chain visibility.
Information sharing will also reduce the needs to use the digital transformation solution such as supply chains systems, digital supply chain, predictive analytics or artificial intelligence.
What is Supply Chain Coordination?
Information sharing requires a certain degree of “coordination” (it’s also referred to as collaboration or integration in scholarly articles). Do you wonder when people started working together as a network? In 1984, companies in the apparel business worked together to reduce overall lead-time. In 1995, companies in the automotive industry used Electronic Data Interchange to share information. So, working as a “chain” is the real-world practice.
What are Conflicting Objectives?
Working as a network requires the same objective, but this is often not the case (even with someone in the same company). “Conflicting Objectives” is the term used to describe the situation when each function wants something that won’t go well together. For example, purchasing people always place the orders to the cheapest vendors (with a very long lead-time) but production people or project manager need material more quickly.
To avoid conflicting objectives, you need to decide if you want to adopt a time-based strategy, low-cost strategy or differentiation strategy. A clear direction is needed so people can make the decisions accordingly.
What is the Cost/Service Trade-off?
The concept of Cost/Service Trade-off appeared as early as in 1985 but it seems that people really don’t get it.
When you want to improve service, the cost goes up. When you want to cut cost, service suffers. It’s like a “seesaw”, the best way you can do is to try to balance both sides.
Real-world example is that a “new boss” ask you to cut costs by 10%, improve service level by 15%, double inventory turns so the financial statement looks good. If you really understand the cost/service trade-off concept, you will agree that you can’t win them all. The most appropriate way to handle this is to prioritize your KPIs.
What is Supply Chain Relationship?
To work as the same team, long-term relationship is key. Otherwise, you’re just a separate company with a different strategy/agenda. So academia keeps preaching about the importance of relationship-building but is not for everyone.
Since there are too many suppliers to deal with, a portfolio matrix is often used to prioritize the relationship-building to create supply chain partners. Focus your time and energy to create a long-term relationship with suppliers of key products and items with limited sources of supply (or items with high supply chain risk.) Because people and human resource are the factors that can make or break your supply chain.
Logistics and Supply Chain References
– Hugo, M. (2003). Essentials of Supply Chain Management. New Jersey: John Willey & Sons Inc.
– Coyle, J. J., Langley, C. J., Novack, R. A., & Gibson, B. (2016). Supply chain management: a logistics perspective. Nelson Education.
– Schönsleben, P. (2007). Integral logistics management: Operations and supply chain management in comprehensive value-added networks. Auerbach Publications.
– Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2008). Designing and managing the supply chain: concepts, strategies and case studies. Tata McGraw-Hill Education.
– Kraljic, P. (1983). Purchasing must become supply management. Harvard business review, 61(5), 109-117.
– Mentzer, J. T., DeWitt, W., Keebler, J. S., Min, S., Nix, N. W., Smith, C. D., & Zacharia, Z. G. (2001). Defining supply chain management. Journal of Business logistics, 22(2), 1-25.