IMPORTANCE OF LOGISTICS

IMPORTANCE OF LOGISTICS

Economic development through an efficient infrastructure 

Did you knows?

There was a time when companies used to develop a product range, plan their distribution channels, schedule marketing campaigns and deliver the final packaged items to their retailers themselves; a simple supplier-managed end-to-end supply chain, requiring a little more from logistics service providers than movement of products from factory to distribution centre to retail outlet. Over time, the scope of customer needs has broadened.

Today, logistics operations have become much more complex as companies find it extremely difficult to maintain their competitive advantage purely on the basis of innovative strategies relating to the product, price, place, or promotion. Since these competitive advantages can easily be imitated, the emphasis now is on building a sustainable competitive advantage through logistics as a means to successfully differentiate oneself from competition.

Formally logistics services can be defined as, “The process of planning, implementing and controlling the efficient flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”  

(Source – Council of Logistics Management). Simply put, it is having the right type of product or service at the right place, at the right time, for a right price and in the right condition.

The main aim of logistics services is to improve the performance of a company’s warehousing, inventory management and distribution network. Logistics solutions enable the centralisation, management and distribution of high-impact, high-value products. Globally, centralised points of distribution enable quicker time to market, resulting in reduced costs and increased market share. Typical functions include procurement /purchasing, inward transport, receiving, warehousing, stock control, order picking, materials handling, outward transport, physical distribution management, recycling, returns, and waste disposal.

The major benefits of efficient and effective logistics operations are:

(1) cost savings by centralising inventory management by reducing the number of inventory holding locations, as well as the size and value of the inventory held, 

(2) faster order fulfilment by relying on a global transportation network and logistics inventory management system, giving them the ability to access and dispatch inventory 24 hours a day, 365 days a year,

(3) improved cash flow by using bonded warehouses for testing and storage, providing the option to defer customs duties and taxes and 

(4) flexibility to efficiently change distribution patterns for new products, based on ever changing customer demands.

The global logistics market has grown tremendously over the years generating total revenues of $3,566 billion ($3.6 trillion) a little over a year ago, representing a compound annual growth rate of six per cent from 2004–08. The industry is predicted to grow at a rate of two per cent over the next five years, expected to reach $4,000 billion ($4 trillion) by the end of 2015.

Although the revenues of the top 10 logistics companies increased by five per cent during 2008, reaching $284.6 billion, in spite of the global financial slowdown, their operating profit decreased by 0.5 per cent to $15 billion. The effect on their bottom line was more dramatic, as net profits decreased by 40.8 per cent to $5.7 billion, yet the logistics industry fared better than many other sectors of the economy and DHL did better than most logistics companies, registering revenues of $46 billion last year.

Logistics management firms nowadays face several challenges, which may be local or global in scope. While the need for integration of logistics activities and lack of qualified human resources are the primary challenges faced at the local level, the global challenges include those arising due to greater distances, modes of transport, documentation, coordination of intermediaries, cultural and political differences, globalisation, need for flexibility and speed (at the same time), need to integrate supply chain activities, and challenges due to emphasis of companies on green logistics.

The major customer groups or key market segments served by the logistics industry are: 

(1) parcel/documents express delivery services, 

(2) freight by air, ocean, road or rail, 

(3) warehousing and distribution and 

(4) supply chain solutions. 

Logistics providers also focus on selected industry sectors where they have developed expertise so that customers benefit from working with specialists – not just in logistics, but also in their particular marketplace. Thus building long-term partnerships and working closely with customers to provide them with real competitive advantage.

As mentioned above; a prerequisite to the development of any economy is an efficient logistics and transportation system and the driver of an efficient logistics and transport system is an efficient freight forwarding sector. Pakistan’s freight forwarding, logistics and transport sector had been virtually non-existent, so about five years ago the government was approached for exploring the merits of addressing this sector. It was evident that to support the growth of Pakistan’s economy this sector would need a focused development effort.  

Additionally it was also realised that a properly articulated and efficient logistics and transport sector could provide services to not only Pakistan’s economy (with a population of 170 million) but also to Central Asia (with a combined population of 60 million), as well as the larger population of Western China.

The country’s international freight forwarding sector  was totally fragmented with no direction, no official  recognition and no access to formal financing, warehousing was non-existent and trucking was totally in  the informal sector having no corporate structure, no access to formal financing and no cross border transport opportunities due to the absence of necessary  legislation and transit mechanisms.

If the country’s international freight forwarding, logistics and transport sectors were to move forward then we would need to institutionalise our existence on a much larger canvass supported with appropriate international linkages. Therefore, the need to create the necessary institutions was the big initial challenge.

Few of the challenges faced by the logistics industry of Pakistan are:

(1) Lack of quality infrastructure.

(2) Railroad transportation is the cheapest form of transportation for distances over 450 km. However, railroads are not extensively used due to the lack of enough intermodal connections with railroads in maritime ports and inland distribution centres. Ports have not developed enough infrastructures for an efficient connection with railroad and truck transportation systems. In addition to this, the lack of efficiency in customs inspection means that the average stay of containers in the ports is double the international average.

(3) The lack of a border crossing agreement for trucks causes delays and inefficiency in import/export processes.

(4) Too many regulations, import/export procedures, and required documents make international trade very slow and costly.

(5) The lack of trained staff means that companies cannot estimate correctly their inventory and cargo movements according to customer demand.

(6) Lack of coordination between the different participants in the supply chain.

(7) A high crime and insecurity index, both in facilities and transportation systems.

(8) Limited use of information technologies by small and medium-sized companies. Most of them see the technologies as an expense, instead of an investment. There is not much promotion on the benefits of using advanced technologies, and there is a backlog in affordable staff training for small companies.

(9) Lack of certainty in the business environment inhibits investments and project development and stifles the country’s efficiency and economic growth.

The future of global forwarding unit in Pakistan is extremely bright. The reason is because our success depends on customers. Forecasting is done according to what they (our customers) tell logistics providers. If they see prosperous opportunities for their exports and imports on their raw material, then this also influences players’ success rate. Few companies like DHL have invested immensely in their offices and warehouse infrastructures due to this reason. These are all long term investments that will eventually payoff.