The APICS Dictionary defines logistics as “the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities.” Meanwhile, a supply chain is defined as “the global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.” While these terms differ significantly, many professionals use them interchangeably.
While it’s true there are some areas where these concepts overlap, the differences usually are fairly clear__if not complex. Consider the following deceptively simple statements about supply chain and logistics.
1. Logistics is about movement. And still, there are many tasks that don’t involve the transport of goods. In product design, for example, there is no product yet in existence. Thus, it’s obvious why many company leaders consider that aspect a supply chain and not a logistics process. Contrast this with retail: Sorting and shelf management do not directly involve material movement, but how things are displayed__taking into consideration factors such as available space, product sizes, sales targets, and current inventory. Are these supply chain management or logistics processes?
2. Logistics is about physical product. Logistics tends to be associated with tangible processes in manufacturing and distribution. Considering the growth of knowledge-based industries such as information technology, people have become the most important resource at many organizations. As such, managing them effectively has become a core differentiator. Functions for making the most of human supply chains even have names such as resource and capacity manager, resource deployment manager, and the like. These jobs require the successful application of supply chain and logistics principles, including sourcing (determining the right personnel via a recruitment team), demand planning (forecasting future skill needs), capacity planning (scheduling training for advanced skills), inventory management (using staff resources appropriately), and demand fulfillment (deploying the right people to satisfy customers).
Another discipline that gained popularity in the late 1990s is financial supply chain management (FSCM), which deals with topics such as financial risk, cash and liquidity, collections, credit, and money disputes. Today, every leading enterprise resources planning solution has an FSCM module, and FSCM helps banks and other financial institutions learn concepts of supply chain management. But professionals in these industries rarely encounter the term “financial logistics.”
3. Supply chain management is strategic; logistics is operational. Most business leaders view strategic issues such as make or buy; international sourcing; contract manufacturing; vendor, distributor, and supplier partnerships; customer service; and product introduction and retirement as falling under the domain of supply chain. These questions are key to a company’s long-term survival, but this doesn’t mean that logistics is irrelevant to the long term.
Logistics often is characterized by operational decisions, such as sending stock to distributors, choosing transport modes, finding optimal transport routes, and managing supplier quotas. But logistics also tackles more strategic issues, including warehouse locations, capacity, choosing third-party logistics (3PL) service providers, the amount of inventory held in the distribution chain, and so on.
4. Logistics evolved into supply chain. Back in the 1970s, when the subject of logistics was raised, what usually came to mind were a truck and a warehouse. Later, the concept of logistics became closely associated with distribution management and included outbound processes such as channel inventory, exporting, order management, reverse logistics, and customs. The scope of logistics eventually was widened to include inbound processes.
Then, once the concept of the supply chain became more popular, most innovations began to fall under the umbrella of supply chain. But, in practice, logistics has not changed much in the past 30 years.
I recently performed a study of the scope of logistics departments in 25 global organizations in 15 different industries. I found in the vast majority of cases they separate logistics and supply chain in the following ways.
Supply chain functions:
- Product development is the core activity for most businesses and requires coordination among functions both inside and outside of the company, including marketing, engineering, research and development, manufacturing, procurement, suppliers, and customer input. While in some companies, this is considered a research and development function, it almost never is categorized as logistics.
- Packaging serves various purposes, such as attracting customers, sales promotion, item protection, and moving items through their distribution channels. There are several organizational entities involved in packaging decisions: marketing, which provides input on layout; distribution, which assesses whether a design is fit for transport and warehousing; engineering and research and development, which ultimately execute packaging design. Additionally, procurement departments factor in determining how raw materials are packaged by suppliers.
- Manufacturing activities, including production planning, scheduling, shop floor management, maintenance, and more generally report to a supply chain leader. Many manufacturing innovations from the last few decades__Just-in-Time, kaizen, and single-minute exchange of die, to name a few__were considered advancements not in logistics, but supply chain. Supply chain and operations management professionals even extend many of these processes outside of manufacturing, for example, Just-in-Time in distribution.
- Quality management, which deals withincoming, in-progress, and outbound quality, is not usually considered part of logistics. Many leading companies today view quality as an organizational philosophy and not merely a set of operational processes. Modern quality tools such as six sigma span the entire organization and do not refer simply to product quality.
- Sourcing represents some 30 to 50 percent of the total product cost in most companies. Thus, it requires a unique, specific focus apart from logistics.
- Warehousing for production materials traditionally was under the control of procurement, while marketing would handle finished goods warehouses. Increasingly, however, warehousing is seen as its own function managing all of a firm’s warehousing needs, encompassing raw materials, finished goods, external warehouses, and bonded import and export locations. These departments handle many elements, including goods management, receipt, issue, and material handling equipment.
- Transportation__in the past, suppliers and transporters bore the responsibility of bringing production materials into the factory. Meanwhile, marketing, distribution, and logistics managed outbound transports. Now, many companies consolidate all transport needs, including inbound, outbound, and within the facility. These consolidated functions are overseen by logistics departments.
- Inventory can claim several different owners, depending on the inventory type. Procurement tends to handle production material. For work in process, it’s production; for finished goods, marketing and distribution; for engineering items and spare parts, maintenance. To boost inventory performance, many companies now identify a single owner—usually the logistics department.
- Importing and exporting, as well as documentation, clearance, and dealing with government regulations and customs, often has its own department in a company. But this is very close to the core definition of logistics__activities facilitating moving and storing of goods__and is considered a part of logistics.
- Reverse logistics is everything related to the returning of materials from the customer back to the point of manufacturing. This always is a part of logistics but often is outsourced to a 3PL provider.
- Logistics outsourcing, by definition, is a logistics process. Internal logistics departments must decide what to outsource, select the right vendor, perform negotiations, and monitor performance.
- Distribution channels are shifting from the conventional model of distributor to wholesaler to retailer. Models such as direct to the wholesaler, direct to the retailer, company-owned retail shops, and internet distribution, are becoming more common. This adds complexity to transportation modes, order management, warehousing, inventory management.
While fairly clear lines exist among many of these functions, others are harder to pin down. Customer service has many elements that encompass marketing, product design, customer relationship management, and supply chain. And setting and meeting customer service levels affects inventory management and warehousing decisions.
Order management likewise is somewhat divided. The marketing team tends to handle the early part of the process__taking customer inquiries, checking availability, promising delivery dates, pricing, and order entry. But order fulfillment influences the production department, and storing, packing, picking, and delivery are logistics functions.
Supply chain and logistics are inextricably tied. While supply chain management may have been characterized as a buzzword in its early days, it now is an indispensable discipline within organizations. And despite some overlap, supply chain and logistics have clearly demarcated responsibilities__and should be treated as so.
Rajesh Ray is leader of the SAP supply chain management product area at IBM Global Business Services. He has written two books on enterprise resources planning and has contributed to 38 international journals. He may be contacted at firstname.lastname@example.org.