How logistics add value to a company
Before explaining how logistics add value to a company, it is important we first understand what logistics mean. What is logistics? Logistics refer to the overall process of managing how resources are acquired, stored, and transported to their final destination. Logistics management involves identifying prospective distributors and suppliers and determining their effectiveness and accessibility.
Logistics is now used widely in the business sector, particularly by companies in the manufacturing sectors, to refer to how resources are handled and moved along the supply chain.
Most businesses, especially small companies or villages in rural locations, don’t have the know-how, or can’t afford to manage a complex supply chain of the scale and scope of the larger local and international industry players on their own.
Supply chaining is a way of collaborating horizontally among suppliers, manufacturers, retailers, and customers to create additional value through economies of scale and efficiencies. The more these supply chains are actively integrated and utilized, the more they encourage and foster the adoption of common standards and practices between companies so that every step of the supply chain can interface with the next encouraging cooperation, development and finally, economic growth. Even developed nations have problems properly implementing these procedures, but they provide substantial value and should be implemented in every economy.
The main goal of effective logistics and supply chain management is providing of competitive advantage. How logistics add values to a company is discussed further below.
How logistics add values to a company
For a long time, it has understood that customers don’t buy products; they buy «benefits.» Put another way, and the product is purchased not for itself but for the promise of what it will «deliver.» Unless the product or service we offer can be distinguished in some way from its competitors, there is a strong likelihood that the marketplace will view it as a «commodity,» and so the sale will tend to go to the cheapest supplier. Therefore it is important to look for additional functionalities of a product that will bring it above competition.
Essentially the development of a plan based upon added values will normally necessitate a more segmented approach to the market. When a company inspects markets closely, it frequently finds that there are different «value segments». In other words, different groups of customers within the total market attach different importance to different benefits. The importance of such benefit segmentation lies in the fact that often there are substantial chances for creating differentiated appeals for specific segments. The one way of getting the competitive edge is through technology breakthroughs. The other way is by focusing upon service as a means of gaining a competitive edge. The service can be seen in many forms including delivery service, after-sales services, financial packages, technical support etc.
For companies who are neither cost nor service leaders world is an uncomfortable place. Their products are indistinguishable from their competitors’ offerings, and they have no cost advantage. These are typical commodity market situations and ultimately, the only strategy is either to move to cost leadership or towards service leadership. Often the cost leadership route is simply not available.
Cost leadership strategies have traditionally been based upon the economies of scale gained through sales volume. This is why market share is considered to be so important in many industries. However, if volume is to be the basis for cost leadership, then it is preferable for that volume to be gained early in the market life cycle. The «experience curve» concept, briefly described earlier, demonstrates the value of early market share gains – the higher your share relative to your competitors the lower your costs should be. This cost advantage can be used strategically to assume a position of price leader and, if appropriate, to make it impossible for higher-cost competitors to survive.
However, an increasingly powerful route to achieving a cost advantage through logistics and supply chain management. In many industries, logistics costs represent such a significant proportion of total costs that it is possible to make major cost reductions through fundamentally re-engineering logistics processes.
The other way out of the «commodity» area is to seek a strategy of differentiation through service excellence. We have already commented on the fact that markets have become more «service-sensitive’. Customers in all industries are seeking greater responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-time delivery, and value-added services that enable them to do a better job of serving their customers.
To summarize, those organizations that will be the leaders in the markets of the future will be those that have sought and achieved the twin peaks of excellence: they have gained both cost leadership and service leadership.