You may not think of Napoleon Bonaparte as a logistician. But his axiom that “an army marches on its stomach”—that is, keeping forces well-provisioned is fundamental to success in war—launched logistics as a field of military concentration.
Today, the term “logistics” applies to the reliable movement of supplies and finished products. According to a Statista study, U.S. businesses spent $1.63 trillion on logistics in 2019, moving goods from origin to end-user through various supply chain network segments. By 2025, a total of 5.95 trillion ton-miles of freight will move across the United States.
Without efficient logistics, a business cannot win the profitability war.
What Is Logistics?
While the terms “logistics” and “supply chain” are sometimes used interchangeably, logistics is an element of the overall supply chain.
Logistics refers to the movement of goods from Point A to Point B, which entails two functions: transportation and warehousing. The overall supply chain is a network of businesses and organizations working in a sequence of processes, including logistics, to produce and distribute goods.
Video: What Is Logistics?
What Is Logistics Management?
Logistics is the collection of processes involved in moving goods internally or from buyer to seller. Logistics managers oversee and control the many complexities involved in that process; in fact, there are a number of certifications for these professionals. Success depends on attention to many details: Routes need to be determined based on expediency, regulatory environments and avoiding obstacles ranging from road repairs to wars and adverse weather conditions. Shipping provider and packaging options must be carefully considered, with costs weighed against factors from weight to recyclability. Fully loaded costs may include factors outside of transportation, such as those that ensure customer satisfaction and the availability of suitable warehousing.
If a shipment of dairy products arrives spoiled because refrigeration failed, that’s on the logistics team.
Fortunately, logistics management software helps businesses make the very best routing and shipping decisions, contain costs, protect investments and track the movement of goods. Such software can often also automate processes, such as choosing shippers according to rate fluctuations or contracts, printing shipping labels, automatically entering transactions in ledgers and on the balance sheet, ordering shipper pickups, recording receipts and receipt signatures and helping with inventory control and other functions.
Key Takeaways
- Logistics is the process of efficiently moving goods from Point A to Point B. Success demands minute attention to detail, from packaging to warehousing to transportation.
- At best, poor logistics will dent a company’s bottom line. At worst, it can be crippling because logistics is the physical manifestation of a transaction—without it, there’s no movement of cash from customer to seller.
- Logistical best practices vary depending on the nature of the business and its product decisions, but the process is always complex. Automation is key to efficiency.
Business and Management Logistics Explained
Business logistics refers to the entire set of processes involved in moving goods, whether from a supplier to a business or from a business to a customer. The key concept here is managing these processes as a unified system. For example, online retailers that successfully drop ship products direct to customers from hundreds or thousands of small suppliers have advanced business logistics practices.
A logistics management system underpins that effort and includes inbound and outbound transportation management, warehouse management, fleet management, order processing, inventory control, supply and demand forecasting, and managing third-party logistics (3PL) service providers.
Importance of Logistics
Logistics centers on the movement of goods, but its effects extend much further. In business, success in logistics translates to increased efficiencies, lower costs, higher production rates, better inventory control, smarter use of warehouse space, increased customer and supplier satisfaction, and an improved customer experience.
Each of these factors can significantly move the needle on a company’s success. Note that logistics also extends to managing returns to extract the most revenue from these goods.
The Role of Logistics
The very essence of a business is to exchange goods or services for money or trade. Logistics is the path those goods and services take to complete the transactions. Sometimes goods are moved in bulk, such as raw goods to a manufacturer. And sometimes goods are moved as individual disbursements, one customer at a time.
No matter the particulars, logistics is the physical fulfillment of a transaction and as such is the life of the business. Where there is no movement of goods or services, there are no transactions—and no profits.
There are seven pillars of effective logistics:
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Material sourcing:
Material sourcing involves more than finding the lowest-cost supplier for a raw material used in manufacturing. Logistics includes calculating and managing contributing factors and costs, such as backorder delays, competitor priority rankings and lockouts, add-on services costs, extraneous fees, increased shipment costs due to distance or regulatory environments, and warehousing costs. Finding the right source for any given material requires a good understanding and management of all contributing factors. This process is called strategic sourcing, and logistics plays an important role in that planning.
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Transportation:
At the core of logistics is the act of physically transporting goods from Point A to Point B. First, a company needs to select the best mode of shipment—air or land, for example—and the best carrier based on cost, speed and distance, including optimizing routes that require multiple carriers. In the case of global shipments, the shipper needs to be up to speed on customs, tariffs, compliance and any relevant regulations. Transport managers need to document and track shipments, manage billing and report on performance using dashboards and analytics.
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Order fulfillment:
To complete a transaction, items must be “picked” from the warehouse per the customer order, properly packaged and labeled and then shipped to the customer. Collectively, these processes comprise order fulfillment and are the heart of the logistics sequence in customer distribution.
To complete a transaction, items must be “picked” from the warehouse per the customer order.
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Warehousing:
Both short- and long-term storage are common parts of logistic planning. But warehouse management systems also enable logistical planning. For example, logistics planners must consider warehouse space availability and special requirements such as cold storage, docking facilities and proximity to modes of transportation such as rail lines or shipyards.
Further, organization within the warehouses is part of logistic planning. Typically, goods that move frequently or are scheduled for transport soon are placed at the front of the warehouse. Lower-demand items are stored toward the rear. Perishable goods are often rotated so the oldest items are shipped out first. Items that are often bundled are usually stored beside one another, and so on.
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Demand forecasting:
Logistics relies heavily on inventory demand forecasting to ensure that a business never runs short on core or high-demand products or materials—and never ties up capital unnecessarily in warehoused goods with sluggish sales, either.
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Inventory management:
By using inventory management techniques to plan ahead for increased demand in seasonal or trending products, companies can keep profits higher and make inventory turns faster, meaning the ratio of how many times you sell and replace inventory in a set period. Conversely, by noting slowing inventory turns on other products, a company can better determine when to offer discount pricing or other incentives to free capital to reinvest in goods that are in higher demand.
Further, retail sales often differ store to store, region to region and country to country. Good inventory management enables the business to decide to ship products that are performing poorly in one store or region to another rather than take a loss via discount pricing to be rid of the stock. Logistics is key to moving inventory where it is likely to get the best price.
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Supply chain management:
Logistics is an important link in the supply chain as it facilitates the movement of goods from suppliers to manufacturers and then to sellers or distributors and eventually to buyers.
A supply chain is essentially a series of transactions. If logistics fails, the supply chain fails and transactions grind to a halt. A prime example: bare shelves in grocery store dairy aisles even as farmers dumped milk as supply chains broke during the pandemic.
Logistics Lingo
3PL (third-party logistics) partners are outsourcers that handle warehousing, fulfillment and returns of certain goods for a fee.
Inbound logistics refers to purchasing and arranging the transportation of products, parts, materials and finished inventory from suppliers to a company’s warehouse or manufacturing plant.
Outbound logistics refers to the flow of items through a company’s production line, warehouse and ultimately to the customer.
Logistics vs Supply Chain Management
Logistics deals with the movement of goods from a single company’s perspective, meaning the movement of materials and goods one company receives and manages internally as well as when it moves those goods to a customer. A supply chain is a network of businesses involved sequentially in the production or distribution of goods or services. In short, logistics is generally a one company issue while the supply chain is a multi-company issue.
While logistics may be coordinated throughout part of or even the entirety of the supply chain, each segment is the responsibility of one entity until it hands off the material or product to another entity in the supply chain.
Logistics Components
In its most basic form, logistic components are:
- Intake from suppliers and material handling;
- Labeling, packaging into smaller units, organization and warehousing;
- Inventory management for production or distribution;
- Demand planning;
- Order fulfillment; and
- Transport.
Typically, a logistics management system includes inbound and outbound transportation management, warehouse management, fleet management, order processing, inventory control, supply and demand forecasting, and management of third-party logistics service providers.
Examples of Logistics
Logistics best practices vary depending on the nature of the business and its product decisions. Consider the variances in the following examples.
A manufacturer bases its business model on a just-in-time inventory management system that aligns receipt of raw materials with production schedules so there is little need to pay for storage and a company’s capital is continuously freed for reinvestment. Its logistics priorities include demand planning, selecting suppliers that consistently deliver on time and on budget, fast intake of materials upon arrival and efficient material handling. Once final goods are manufactured, priorities shift to packaging the finished product and transporting it to distributors, wholesalers, retailers or other customers. Manufacturers need to manage true end-to-end logistics from procurement to receipt to manufacturing to packaging, storage and transportation to a buyer.
If the manufacturer has a direct-to-consumer model, it may use a supply chain as a service provider to get its products to the end customer.
In the second example, a boutique clothing store orders stock from designers and manufacturers. Finished goods arrive at the retailer’s main distribution warehouse for intake. The items are first unitized—broken down from bulk commercial packaging to individual consumer packages. Barcodes are added, then items are sorted, packaged and shipped to the store or a nearby warehouse. Logistics for the retailer begins with intake of goods and continues through the movement of those goods to their final destinations, which in this case is a brick-and-mortar store, not the final customer.
In a second retail scenario, some or all of the goods are sent to an order-fulfillment center, where they are processed and shipped to the end customer, who likely made the purchase online. In this scenario, logistics entails the retailer receiving the goods it ordered from suppliers, unitizing them and storing them in the fulfillment center’s storage onsite to be sorted per customer order and then shipped by a third-party logistics supply company, such as UPS, FedEx or USPS.
In a third scenario, the retailer redistributes its in-store inventory to other stores where demand for the product is higher to avoid discounting and taking a hit to profits. Or, the retailer may know from its analysis that demand is sluggish everywhere for certain products. In that case, the more quickly it marks the stock down or sells to a retail discounter at a reduced bulk price the more likely it is to recoup much of its investment. Logistics in this scenario entail inventory control, demand planning, pulling, packing and shipping products between stores, moving some items to sales racks, and shipping a bulk distribution in a transaction with a third-party seller.
If the retailer declares some remaining product as too costly to sell, because demand is too low at any price, then logistics would also include transport of these items to a charity for a tax write-off. If some of that product is also damaged, the retailer’s logistics manager would transport it to a disposal site.
The steps in recycling logistics
6 Benefits of Logistics Management
Given that the movement of goods is what drives cash flow, it stands to reason that managing that movement—logistics management—is a core business concern. Indeed, logistics management impacts a company’s bottom line for better or worse. It’s best not to leave that impact to chance.
The following are six major benefits of effective logistics management.
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Visibility:
Logistics management affords greater visibility into the supply chain. This enables businesses to better control costs, tease out efficiencies, spot supply chain problems, conduct demand planning and gain insights into opportunities.
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Reduced overhead:
Logistics management enables companies to reduce overhead in areas from cutting shipping costs to shrinking how much warehouse space they need by proactively controlling inventory levels.
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Improved customer experience:
An excellent customer experience (CX) is the driving factor behind repeat sales. By delivering orders accurately and quickly, you improve the customer experience which in turn increase brand loyalty and future sales.
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Preventing loss:
Logistics management helps prevent loss in several ways. One is by a true inventory accounting, so your company knows exactly how much stock it has on hand at any given time. Companies can also track movement and current location so stock won’t be misplaced or diverted without notice. In addition, by ensuring optimal storage and transport conditions, such as temperature and moisture management, solid logistics prevents spoilage and damage.
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Support expansion:
Demand forecasting supports expansion by realistically calculating inventory needs and ordering, transporting and stocking accordingly. Further, logistics management best practices help companies scale to fulfill more customer orders on time.
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Competitive edge:
Delivering orders correctly and on time is a foundational element in the customer experience—and good CX is key to repeat orders as well as solid brand reputation and net promotor scores, which in turn help a company acquire new buyers. Logistics management helps a company consistently deliver, or over deliver, on promises and sharpen its competitive edge.
7 Rs of Logistics
The Chartered Institute of Logistics and Transport, an international organization for supply chain, logistics and transport professionals, defines the seven Rs of logistics as “getting the right product, in the right quantity, in the right condition, at the right place, at the right time, to the right customer, at the right price.”
And in truth, that is the goal of logistics management.
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Right product:
Job #1 is delivering the product that was ordered according to specifications: color, size, brand, quantity. But also consider an automated maintenance plan where manufacturers use IoT data to send a “just-in-time” replacement part, or something else that the customer may have not specified but needs. The point is to get buyers the products that are right for them or their situations.
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Right quantity:
Say an item can be purchased as either a single unit or in packs of 12, which are also considered a unit. On a larger scale, a manufacturer may sell parts in a box containing a few products or as a pallet of multiple boxes. Getting quantity right demands clarity in how inventory is listed as well as proper picking and packing.
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Right condition:
New, used or refurbished, customers expect a product to function properly and otherwise be useable. Products should therefore be inspected for flaws and damage prior to shipping. And, return shipping processes should be simple and convenient for customers.
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Right place:
Tracking to ensure receipt and that shipped items were delivered to the right address are essential parts of logistics management.A package that is never received and must be replaced costs a company twice—and damages the customer relationship.
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Right time:
Often, from the customer’s perspective, timing is everything. Whether it’s a consumer ordering a birthday or holiday gift or a manufacturer that needs a raw material to meet its schedules, late arrivals may cost the customer or be returned as no longer needed.
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Right customer:
Order mix-ups, address errors and other mishaps communicate a lack of respect for the customer and inattention to detail. An ERP system that automates outbound logistics can minimize errors and maximize a company’s supply chain execution.
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Right price:
It’s important that your pricing be competitive for the geographic area and the industry to turn your inventory regularly and at a good margin.It is also imperative to adjust pricing—up or down—according to demand. To succeed here, companies need continuous insights into profitability ratios and unit margins.
4 Areas to Get Started With Business Logistics
Successful logistics is equal parts strategy and planning. Your strategy should encompass tactics to make the movement of goods work in your favor. Your plan should outline all the steps your company will need to take to bring your strategy to life.
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Spatial management:
Logistics requires sufficient space for goods; warehouse and material handling equipment; and people to receive, store, pick, package, label and ship goods. Your warehouse management strategy should focus on making wise use of space so that goods are handled efficiently while keeping square footage and maintenance costs as low as possible.
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Management & staffing:
One of the greatest expenses in any warehouse is staffing, so reducing picking time is a money saver. Inventory management software can show staff exactly where items are shelved and the best routes to take when pulling more than one item. Is your business seasonal? Plan for the necessary upsizing and downsizing in staffing to meet demand. You’ll need policies to guard against theft without making your people feel over-policed. Then there are benefits packages, workers’ comp insurance and other HR-related functions that are crucial to a well-managed logistics team.
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Equipment:
Logistics requires specialized equipment, such as a truck fleet, conveyor belts, robotics and forklifts or some combination, depending on the type of materials or goods your company handles and how much of the work you outsource. Besides the capital expense, managing equipment and related issues including maintenance, insurance and depreciation, requires careful planning and tracking.
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IT infrastructure:
Your IT infrastructure must to be optimized to accommodate functions from online ordering and purchasing to warehouse automation, IoT and other technologies key to your logistics strategy.
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How ERP Benefits Logistics
Enterprise resource planning software (ERP) integrates a variety of applications that together constitute the flow of information within the company. This happens to also make ERP a powerful logistics tool as it enables effective order fulfillment.
Three top areas where ERP benefits logistics are inventory control, staff management and product distribution.
For example, fleet operators can manage asset distribution and maintenance based on information, such as work orders and parts inventory, pulled from ERP systems and feed that data back into the information flow as tasks are completed. Similarly, inventory control and supply chain insights can be automatically routed to reports, such as ledgers and the balance sheet, purchasing reports and automated ordering, and fleet and employee scheduling.
Transportation and logistics are central to your company’s success as it is the physical manifestation of transactions and without transactions there is no business. Managing logistics is also critical to the company’s financial health in that it can add or subtract money from the bottom line. Using software such as RPA, ERP, warehouse management, supply chain management, and others, a company can add efficiencies, cut costs and gain control over this important business aspect.
