Marketing Logistics and Supply Chain Management

In today’s global marketplace, selling a product is sometimes easier than getting it to customers. Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments, at the right time, and in the right place. Logistics effectiveness has a major impact on both customer satisfaction and company costs. Here we consider the nature and importance of logistics management in the supply chain, the goals of the logistics system, major logistics functions, and the need for integrated supply chain management.

Nature and Importance of Marketing Logistics

To some managers, marketing logistics means only trucks and warehouses. But modern logistics is much more than this. Marketing logistics—also called physical distribution—involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit. In short, it involves getting the right product to the right customer in the right place at the right time profitably.

In the past, physical distribution planners typically started with products at the plant and then tried to find low-cost solutions to get them to customers. However, today’s customer-centered logistics starts with the marketplace and works backward to the factory or even to sources of supply. Marketing logistics involves not only outbound logistics (moving products from the factory to resellers and ultimately to customers) but also inbound logistics (moving products and materials from suppliers to the factory) and reverse logistics (reusing, recycling, refurbishing, or disposing of broken, unwanted, or excess products returned by consumers or resellers). That is, it involves the entirety of supply chain management—managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers, as shown in A green circle icon. Figure 12.5.

A green circle icon. Figure 12.5

Supply Chain Management

Chart explains Supply Chain Management.

The logistics manager’s task is to coordinate the activities of suppliers, purchasing agents, marketers, channel members, and customers. These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing, and transportation planning.

Companies today are placing greater emphasis on logistics for several reasons. First, companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices.

A photo shows a number of cars parked near a huge shipping vessel. Some cars are going into the ship's hull.

Photo shows a number of cars parked near a huge shipping vessel. Some cars are going into the ship's hull. The importance or logistics: At any given time, GM has hundreds of millions of tons of finished vehicles and parts in transit, running up an annual logistics bill of about $8 billion. Even small savings can be substantial.

Bloomberg/Getty Images

Second, improved logistics can yield tremendous cost savings to both a company and its customers. As much as 20 percent of an average product’s price is accounted for by shipping and transport alone. American companies spend $1.45 trillion each year—about 8.3 percent of GDP—to wrap, bundle, load, unload, sort, reload, and transport goods. That’s more than the total national GDPs of all but 12 countries worldwide. A blue circle icon. By itself, General Motors has hundreds of millions of tons of finished vehicles, production parts, and aftermarket parts in transit at any given time, running up an annual logistics bill of around $8 billion dollars. Shaving off even a small fraction of logistics costs can mean substantial savings. For example, GM recently announced a logistical overhaul that would save nearly $2 billion over two years in North America alone.18

Third, the explosion in product variety has created a need for improved logistics management. For example, in 1916 the typical Piggly Wiggly grocery store carried only 605 items. Today, a Piggly Wiggly carries a bewildering stock of between 20,000 and 35,000 items, depending on store size. A Walmart Supercenter store carries more than 140,000 products, 30,000 of which are grocery products.19 Ordering, shipping, stocking, and controlling such a variety of products presents a sizable logistics challenge.

Improvements in information technology have also created opportunities for major gains in distribution efficiency. Today’s companies are using sophisticated supply chain management software, internet-based logistics systems, point-of-sale scanners, RFID tags, satellite tracking, and electronic transfer of order and payment data. Such technology lets them quickly and efficiently manage the flow of goods, information, and finances through the supply chain.

Finally, more than almost any other marketing function, logistics affects the environment and a firm’s environmental sustainability efforts. Transportation, warehousing, packaging, and other logistics functions are typically the biggest supply chain contributors to the company’s environmental footprint. Therefore, many companies are now developing green supply chains.

Sustainable Supply Chains

Companies have many reasons for reducing the environmental impact of their supply chains. For one thing, if they don’t green up voluntarily, a host of sustainability regulations enacted around the world will soon require them to. For another, many large customers—from Walmart and Nike to the federal government—are demanding it. Even consumers are demanding it: According to one survey, 50 percent of millennials are willing to pay more for sustainable products and 39 percent do research into the sustainability practices of companies before making a purchase.20 Thus, environmental sustainability has become an important factor in supplier selection and performance evaluation. But perhaps even more important than having to do it, designing sustainable supply chains is simply the right thing to do. It’s one more way that companies can contribute to saving our world for future generations.

But that’s all pretty heady stuff. As it turns out, companies have a more immediate and practical reason for turning their supply chains green. Not only are sustainable channels good for the world, they’re also good for a company’s bottom line. The very logistics activities that create the biggest environmental footprint—such as transportation, warehousing, and packaging—also account for a lion’s share of logistics costs. Companies green up their supply chains through greater efficiency, and greater efficiency means lower costs and higher profits. In other words, developing a sustainable supply chain is not only environmentally responsible, it can also be profitable. Consider Nike:21

A photo shows a pair of black Nike sneakers. Text alongside reads “The Higg Index - Sustainable Apparel Coalition.”

Photo shows a pair of black Nike sneakers. Text alongside reads "The Higg Index - Sustainable Apparel Coalition." Green supply chains: Nike has developed a sweeping strategy for greening its supply chain. The Higg Index lets Nike work with suppliers and distributors to reduce the supply chain’s environmental footprint while at the same time reducing its logistics costs.

Thanapun/Shutterstock

Nike, the iconic sports shoe and apparel company, has developed a sweeping strategy for greening every phase of its supply chain. A blue circle icon. For example, Nike recently teamed with Levi’s, REI, Target, and other members of the Sustainable Apparel Coalition to develop the Higg Index—a tool that measures how a single apparel product affects the environment across the entire supply chain. Nike uses the Higg Index to work with suppliers and distributors to reduce its supply chain’s environmental footprint. For instance, during just the past three years, the more than 900 contract factories that make Nike footwear worldwide have reduced their carbon emissions by 6 percent, despite production increases of 20 percent. That’s equivalent to an emissions savings equal to more than 1 billion car-miles.

Nike has found that even seemingly simple supply chain adjustments can produce big benefits. For example, the company sources its shoes in Asia, but most are sold in North America. Until about a decade ago, the shoes were shipped from factory to store by airfreight. After analyzing distribution costs more carefully, Nike shifted a sizable portion of its cargo to ocean freight. That simple shoes-to-ships shift reduced emissions per product by 4 percent, making environmentalists smile. But it also put a smile on the faces of Nike’s accountants by saving the company some $8 million a year in shipping costs.

Goals of the Logistics System

Some companies state their logistics objective as providing maximum customer service at the least cost. Unfortunately, as nice as this sounds, no logistics system can both maximize customer service and minimize distribution costs. Maximum customer service implies rapid delivery, large inventories, flexible assortments, liberal returns policies, and other services—all of which raise distribution costs. In contrast, minimum distribution costs imply slower delivery, smaller inventories, and larger shipping lots—which represent a lower level of overall customer service.

The goal of marketing logistics should be to provide a targeted level of customer service at the least cost. A company must first research the importance of various distribution services to customers and then set desired service levels for each segment. The objective is to maximize profits, not sales. Therefore, the company must weigh the benefits of providing higher levels of service against the costs. Some companies offer less service than their competitors and charge a lower price. Other companies offer more service and charge higher prices to cover higher costs.

Major Logistics Functions

Given a set of logistics objectives, the company designs a logistics system that will minimize the cost of attaining these objectives. The major logistics functions are warehousing, inventory management, transportation, and logistics information management.

Warehousing

Production and consumption cycles rarely match, so most companies must store their goods while they wait to be sold. For example, Snapper, Toro, and other lawn mower manufacturers run their factories all year long and store up products for the heavy spring and summer buying seasons. The storage function overcomes differences in needed quantities and timing, ensuring that products are available when customers are ready to buy them.

A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centers. Storage warehouses store goods for moderate to long periods. In contrast, distribution centers are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.

For example, Amazon operates more than 100 giant distribution centers, called fulfillment centers, which fill online orders and handle returns. These centers are huge and highly automated. For example, the Amazon fulfillment center in Tracy, California, ­covers 1.2 million square feet (equivalent to 27 football fields). At the center, 4,000 employees control an inventory of 21 million items and ship out up to 700,000 packages a day to Amazon customers in Northern California and parts of the Pacific Northwest. During last year’s Cyber Monday, Amazon’s fulfillment center network filled customer orders at a rate of more than 500 items per second globally.22

Like almost everything else these days, warehousing has seen dramatic changes in technology in recent years. Outdated materials-handling methods are steadily being replaced by newer, computer-controlled systems requiring fewer employees. Computers and scanners read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices. For example, to improve efficiency in its massive fulfillment centers, Amazon recently purchased robot maker Kiva Systems:23

A photo shows a massive storage place in which orange color robots in the shape of mini vans are seen moving around.

Photo shows a massive storage place in which orange color robots in the shape of mini vans are seen moving around. High-tech distribution centers: Amazon employs teams of super-retrievers—day-glo orange Kiva robots—to keep its fulfillment centers humming.

Bloomberg via Getty Images

When you buy from Amazon, the chances are still good that your order will be plucked and packed by human hands. A blue circle icon. However, the humans in Amazon’s fulfillment centers are increasingly being assisted by an army of squat, ottoman-size, day-glo orange robots. Amazon now has more than 30,000 of them in 13 fulfillment centers, double the number from a year ago. The robots bring racks of merchandise to workers, who in turn fill boxes. Dubbed the “magic shelf,” racks of items simply materialize in front of workers, with red lasers pointing to items to be picked. The robots then drive off and new shelves appear. The super-efficient robots work tirelessly 16 hours a day, seven days a week. They never complain about the workload or ask for pay raises, and they are pretty much maintenance free. “When they run low on power, they head to battery-charging terminals,” notes one observer, “or, as warehouse personnel say, ‘They get themselves a drink of water.’”

Inventory Management

Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much. With too little stock, the firm risks not having products when customers want to buy. To remedy this, the firm may need costly emergency shipments or production. Carrying too much inventory results in higher-than-necessary inventory-carrying costs and stock obsolescence. Thus, in managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits.

Many companies have greatly reduced their inventories and related costs through just-in-time logistics systems. With such systems, producers and retailers carry only small inventories of parts or merchandise, often enough for only a few days of operations. New stock arrives exactly when needed rather than being stored in inventory until being used. Just-in-time systems require accurate forecasting along with fast, frequent, and flexible delivery so that new supplies will be available when needed. However, these systems result in substantial savings in inventory-carrying and inventory-handling costs.

Marketers are always looking for new ways to make inventory management more efficient. In the not-too-distant future, handling inventory might even become fully automated. For example, many companies now use some form of RFID or “smart tag” technology, by which small transmitter chips are embedded in or placed on products and packaging for everything from flowers and razors to tires. Such “smart” products could make the entire supply chain—which accounts for up to 75 percent of a product’s cost—intelligent and automated.

Companies using RFID know, at any time, exactly where a product is located physically within the supply chain. “Smart shelves” would not only tell them when it’s time to reorder but also place the order automatically with their suppliers. Such exciting new information technology is revolutionizing distribution as we know it. Many large and resourceful marketing companies, such as Walmart, Macy’s, P&G, Kraft, and IBM, are investing heavily to make the full use of RFID technology a reality.

Transportation

The choice of transportation carriers affects the pricing of products, delivery performance, and the condition of goods when they arrive—all of which will affect customer satisfaction. A blue circle icon. In shipping goods to its warehouses, dealers, and customers, the company can choose among five main transportation modes: truck, rail, water, pipeline, and air along with an alternative mode for digital products—the internet.

A photo shows a massive multi-axle truck carrying a huge container, a large crane operating near a giant ship, rows of container nearby, while an airplane flies above.

Photo shows a massive multi-axle truck carrying a huge container, a large crane operating near a giant ship, rows of container nearby, while an airplane flies above. Transportation: In shipping goods to their warehouses, dealers, and customers, companies can choose among many transportation modes, including truck, rail, water, pipeline, and air. Much of today’s shipping requires multiple modes.

Thanapun/Shutterstock

Trucks have increased their share of transportation steadily and now account for 40 percent of total cargo ton-miles (a ton of freight moved one mile) transported in the United States. Trucks are highly flexible in their routing and time schedules, and they can usually offer faster service than railroads. They are efficient for short hauls of high-value merchandise. Trucking firms have evolved in recent years to become full-service providers of global transportation services. For example, large trucking firms now offer everything from satellite tracking, internet-based ­shipment management, and logistics planning software to cross-border shipping operations.24

Railroads account for 26 percent of the total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk products—coal, sand, minerals, and farm and forest products—over long distances. In recent years, railroads have increased their customer services by designing new equipment to handle special categories of goods, providing flatcars for carrying truck trailers by rail ­(piggyback), and providing in-transit services such as the diversion of shipped goods to other destinations en route and the processing of goods en route.

Water carriers, which account for 7 percent of the cargo ton-miles, transport large amounts of goods by ships and barges on U.S. coastal and inland waterways. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products such as sand, coal, grain, oil, and metallic ores, water transportation is the slowest mode and may be affected by the weather. Pipelines, which account for 17 percent of the cargo ton-miles, are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets. Most pipelines are used by their owners to ship their own products.

Although air carriers transport less than 1 percent of the cargo ton-miles of the nation’s goods, they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached. Among the most frequently airfreighted products are perishables (such as fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewelry). Companies find that airfreight also reduces inventory levels, packaging costs, and the number of warehouses needed.

The internet carries digital products from producer to customer via satellite, cable, phone wire, or wireless signal. Software firms, the media, music and video companies, and education all make use of the internet to deliver digital content. The internet holds the potential for lower product distribution costs. Whereas planes, trucks, and trains move freight and packages, digital technology moves information bits.

Shippers also use multimodal transportation—combining two or more modes of transportation. Eight percent of the total cargo ton-miles are moved via multiple modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Combining modes provides advantages that no single mode can deliver. Each combination offers advantages to the shipper. For example, not only is piggyback cheaper than trucking alone, but it also provides flexibility and convenience. Numerous logistics companies provide single-source multimodal transportation solutions.

Logistics Information Management

Companies manage their supply chains through information. Channel partners often link up to share information and make better joint logistics decisions. From a logistics perspective, flows of information, such as customer transactions, billing, shipment and inventory levels, and even customer data, are closely linked to channel performance. Companies need simple, accessible, fast, and accurate processes for capturing, processing, and sharing channel information.

Information can be shared and managed in many ways, but most sharing takes place through electronic data interchange (EDI), the digital exchange of data between organizations, which primarily is transmitted via the internet. Walmart, for example, requires EDI links with its more than 100,000 suppliers through its Retail Link sales data system. If new suppliers don’t have the required EDI capability, Walmart will work with them to find and implement the needed tools.25

In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers. Many large retailers—such as Walmart and Home Depot—work closely with major suppliers such as P&G or Moen to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems. Using VMI, the customer shares real-time data on sales and current inventory levels with the supplier. The supplier then takes full responsibility for managing inventories and deliveries. Some retailers even go so far as to shift inventory and delivery costs to the supplier. Such systems require close cooperation between the buyer and seller.

Integrated Logistics Management

Today, more and more companies are adopting the concept of integrated logistics ­management. This concept recognizes that providing better customer service and trimming distribution costs require teamwork, both inside the company and among all the marketing channel organizations. Inside, the company’s various departments must work closely together to maximize its own logistics performance. Outside, the company must integrate its logistics system with those of its suppliers and customers to maximize the performance of the entire distribution network.

Cross-Functional Teamwork Inside the Company

Most companies assign responsibility for various logistics activities to many different departments—marketing, sales, finance, operations, and purchasing. Too often, each function tries to optimize its own logistics performance without regard for the activities of the other functions. However, transportation, inventory, warehousing, and information management activities interact, often in an inverse way. Lower inventory levels reduce ­inventory-carrying costs. But they may also reduce customer service and increase costs from stockouts, backorders, special production runs, and costly fast-freight shipments. Because distribution activities involve strong trade-offs, decisions by different functions must be coordinated to achieve better overall logistics performance.

The goal of integrated supply chain management is to harmonize all of the company’s logistics decisions. Close working relationships among departments can be achieved in several ways. Some companies have created permanent logistics committees composed of managers responsible for different physical distribution activities. Companies can also create supply chain manager positions that link the logistics activities of functional areas. For example, P&G has created product supply managers who manage all the supply chain activities for each product category. Many companies have a vice president of logistics or a supply chain VP with cross-functional authority.

An image shows Oracle' Supply Chain Management webpage.

Image shows Oracle' Supply Chain Management webpage. Integrated logistics management: Oracle’s supply chain management software solutions help companies to “gain sustainable advantage and drive innovation by transforming their traditional supply chains into integrated value chains.”

Oracle Corporation

Finally, companies can employ sophisticated, system-wide supply chain management software, now available from a wide range of software enterprises large and small, from Oracle and SAP to Infor and Logility. A blue circle icon. For example, Oracle’s supply chain management software solutions help companies to “gain sustainable advantage and drive innovation by transforming their traditional supply chains into integrated value chains.”26 It coordinates every aspect of the supply chain, from value chain collaboration to inventory optimization to transportation and logistics management. The important thing is that the company must coordinate its logistics, inventory investments, demand forecasting, and marketing activities to ­create high market satisfaction at a reasonable cost.

Building Logistics Partnerships

Companies must do more than improve their own logistics. They must also work with other channel partners to improve whole-channel distribution. The members of a marketing channel are linked closely in creating customer value and building customer relationships. One company’s distribution system is another company’s supply system. The success of each channel member depends on the performance of the entire supply chain. For example, furniture retailer IKEA can create its stylish but affordable furniture and deliver the “IKEA lifestyle” only if its entire supply chain—consisting of thousands of merchandise designers and suppliers, transport companies, warehouses, and service providers—operates at maximum efficiency and with customer-focused effectiveness.

Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduce channel costs. Many companies have created cross-functional, cross-company teams. For example, Nestlé’s Purina pet food unit has a team of dozens of people working in Bentonville, Arkansas, the home base of Walmart. The Purina Walmart team members work jointly with their counterparts at Walmart to find ways to squeeze costs out of their distribution system. Working together benefits not only Purina and Walmart but also their shared, final consumers.

Other companies partner through shared projects. For example, many large retailers conduct joint in-store programs with suppliers. Home Depot allows key suppliers to use its stores as a testing ground for new merchandising programs. The suppliers spend time at Home Depot stores watching how their product sells and how customers relate to it. They then create programs specially tailored to Home Depot and its customers. Clearly, both the supplier and the customer benefit from such partnerships. The point is that all supply chain members must work together in the cause of bringing value to final consumers.

Third-Party Logistics

Although most big companies love to make and sell their products, many loathe the associated logistics “grunt work.” They detest the bundling, loading, unloading, sorting, storing, reloading, transporting, customs clearing, and tracking required to supply their factories and get products to their customers. They hate it so much that many firms outsource some or all of their logistics to third-party logistics (3PL) providers such as Ryder, Penske Logistics, BAX Global, DHL Logistics, FedEx Logistics, and UPS Business Solutions.

For example, UPS knows that, for many companies, logistics can be a real nightmare. But logistics is exactly what UPS does best. To UPS, logistics is today’s most powerful force for creating competitive advantage. “We A heart icon. logistics,” proclaims UPS. “It makes running your business easier. It can make your customers happier. It’s a whole new way of thinking.” As one UPS ad concludes: “We love logistics. Put UPS to work for you and you’ll love logistics too.”

At one level, UPS can simply handle a company’s package shipments. But on a deeper level, UPS can help businesses sharpen their own logistics systems to cut costs and serve customers better. At a still deeper level, companies can let UPS take over and manage part or all of their logistics operations. For example, consumer electronics maker Toshiba lets UPS handle its entire laptop PC repair process—lock, stock, and barrel. And UPS not only delivers packages for online shoe and accessories marketer Zappos, it also manages Zappos’s important and complex order returns process in an efficient, customer-pleasing way.27

3PL providers like UPS can help clients tighten up sluggish, overstuffed supply chains; slash inventories; and get products to customers more quickly and reliably. According to one report, 86 percent of Fortune 500 companies use 3PL (also called outsourced logistics or contract logistics) services. General Motors, P&G, and Walmart each use 50 or more 3PLs.28

Companies use third-party logistics providers for several reasons. First, because getting the product to market is their main focus, using these providers makes the most sense, as they can often do it more efficiently and at lower cost. Outsourcing logistics typically results in a 10 to 25 percent cost savings.29 Second, outsourcing logistics frees a company to focus more intensely on its core business. Finally, integrated logistics companies understand increasingly complex logistics environments.

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