1.4 How Logistics Adds Value

Astute managers know that the end customer is the only one who puts money into a supply chain. To meet customer needs, you must remember Peter Drucker’s advice, “What the customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him.”

Economic Utilities

Utility is an economic term used to describe perceived value. Economists discuss five utilities. Logistics influences all five.

Possession Utility is created by marketing when it translates customer needs into product and service requirements, promotes the resulting product’s value, and facilitates exchange so the customer may “possess” it. Most of the ads that you see on social media and your favorite webpages have been targeted specifically to you based on your networks and viewing activities. The goal: To make you desire to “possess” that item. But you can only possess it if logistics systems work properly!
Form Utility is the primary responsibility of purchasing and operations managers who acquire inputs and transform them into products or services of greater customer value. Logistics is playing a larger role in form utility as it helps companies like Procter and Gamble or General Mills repackage products during distribution into special sizes, sample packs, or multi-packs, perhaps for warehouse stores like Costco or Sam’s Club. Logistics is also involved in product take back (reverse logistics), refurbishment, and resale.
Time Utility occurs when a product arrives when it is needed. In just-in-time manufacturing, parts and components are carefully staged with precise delivery times to arrive just when they are needed for assembly or sale. Retailers, like Walmart and Costco, require that their suppliers schedule precise delivery times so that a dock and personnel are available for unloading—and in some cases to immediately re-load the goods into waiting trailers at other docks (cross-docking). When a product simply sits and waits, no value is created.
Place Utility involves delivering an item exactly where it is needed. One of the main reasons that you shop online is place utility. Online retailers like Amazon.com and Alibaba.com provide place utility by delivering products directly to your home or office. Businesses that supply other businesses, like auto parts manufacturer Bosch to Audi, add value by delivering to the factory and the dock where the part or component is needed for production.
Quantity Utility focuses on delivering customers the right amount of product. The Costco distribution center (DC) mentioned above may receive full truckload shipments of toilet paper, coffee, and canned corn at about the same time. Stores, however, do not need a whole truck of any of these items. So, they are unloaded at the DC (breaking bulk) and mixed—perhaps one or more pallets of each—with other goods (assorting) to fill a store-bound trailer. This combination of “breaking bulk” and “assorting” helps firms meet customers’ desire to buy a variety of items at one location—and at affordable prices.

More and more firms offer free shipping and returns to customers who order products from the internet for home delivery—providing time and place utility. Unfortunately, because online customers cannot physically see, touch, or try on the items they are ordering, the rate of returns is high. Processing these returns is expensive and can be as much as $6-$18 per item.

To reduce the level of returns—and the cost, extra handling, and inconvenience associated with them—firms are trying a variety of innovative approaches, including the following:

Amazon.com service representatives are authorized to reduce the price of slightly damaged, but still usable goods. The customer may prefer getting a great deal on a scratched guitar, saving Amazon the cost of replacement (and discounting the scratched guitar to resell to another customer).

If you are not tagged as a "frequent returner," Amazon may even let you keep something they accidentilly sent you, especially if the cost of returning is high compared to the value of the item.
Rue La La, a seller of “designer brands” at “member prices,” tracks customer orders and returns. If data show a customer typically orders both mediums and smalls, and ends up returning the mediums, a pop-up reminds the customer of this fact, suggesting she order only smalls this time. As a result, customer satisfaction is up and returns are down.
QVC Group, a home shopping network, notes that its 2013 returns amounted to 19.4% of gross product revenue. QVC now follows up on orders with e-mails (and videos for high-return items) that advise customers on how to assemble and use products. The return rate has dropped dramatically—by 30% on one product. By 2020, returns dropped to 15.6%. QVC must be doing something right, as it is the top-rated retailer in Forrester's 2020 Customer Experience Index.1

Unless your company is a deep discounter or purveyor of rare goods, it is almost impossible to completely avoid returns for goods. However, innovative ideas like these can make the shopping experience more pleasant for the customer and more cost effective for your organization.

Movement, Storage and Processing

UPS made logistics a household term with its popular “We ❤ Logistics” advertising campaign. UPS’ catchy commercial, sung to the popular tune, “That’s Amore,” both defined logistics and touted its ability to impact financial performance and make your life better.

When it's planes in the sky for a chain of supply—that's logistics.
When the pipes for the line come precisely on time—that's logistics.
A continuous link that is always in sync—that's logistics.
Carbon footprint's reduced, bottom line gets a boost—that's logistics.
With new ways to compete, there'll be cheers on Wall Street—that's logistics.
When technology knows right where everything goes—that's logistics.
Bells will ring, ring-a-ding ring-a-ding ring-a-ding—that's logistics.
There will be no more stress 'cause you called UPS—that's logistics.

In other words, logistics creates value through movement, storage, and processing.

Movement

When you hear the word logistics, your first thoughts probably focus on transportation or movement. Transportation permits goods to flow from one place to another, making global trade possible. Transportation decisions begin with modal choice. Choosing the right mode of transportation—for example shipping by truck, rail, air, water, pipeline, drone, or some combination—affects speed, reliability, cost, and other service factors. To make the right choice, we need to understand our customers’ needs. Transportation modes will be presented in Topic 7. Importantly, different modes have different environmental impacts in terms of pollution, noise, and other factors. Sustainability issues are discussed in Topic 4.

Storage

Storage is becoming more strategic to companies as they try to serve global markets. You must try to balance inventory levels, locations, and choice of transport mode to serve your customers quickly. These issues become even trickier as more customers (both B2C and B2B) increase online ordering. That is, you must manage both traditional bricks-and-mortar and clicks-and-mortar supply chains. No one wants too much inventory sitting around, where it can lose value as it ages and becomes obsolete—getting damaged, lost, or stolen. Topic 8 and Topic 9 talk about how to best manage inventory. Topic 10 explains warehousing principles.

Figure 1.4: Movement and Storage Come Together in the Distribution Center

Processing

Although most people think logistics is primarily movement and storage, UPS’ “We ❤ Logistics” campaign highlights the importance of processing. Processing deals with the flow of information and the visibility of shipments during movement and storage. Visibility allows you to always know where your goods are as they move toward you. Some companies, like Dell Computers, take advantage of this visibility to divert shipments in route, switching their final destination to a location where the need is greater as demand shifts. Many carriers advertise this capability to their customers.

When movement, storage, and processing all work together, the entire supply chain works. Consider the Council for Supply Chain Management Professionals’ (CSCMP) definition of Supply Chain Management:

Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.2

We consider the supply chain as beginning with the customer’s identification of a need and including all value-added activities performed by supply chain partners from the suppliers of the earliest raw materials through the end of a product’s life—whether that be Reuse, Recycling, or Disposal. Logistics is the “coordination” mechanism that brings the entire chain together.

To summarize, logistics decisions you make every day impact your company’s ability to deliver on its promises to customers—its value proposition. This means you have to understand what your organization’s value proposition to the customers is. You have to look through the customer’s eyes. For example, we might think that we are adding value by getting an item shipped to a customer ahead of schedule, but the customer may be annoyed—especially if it hasn’t yet sold/used the items from its previous order. The customer may not have room to store the new shipment. Time utility emerges when you deliver when the customer wants rather than as soon as possible—unless that is what the customer wants. If you stay focused on creating customer value, you can contribute to your organization’s competitive advantage.

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