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Profit Leverage Effect of Logistics and Cost Saving Opportunities Essay

Logistics was initially a military term but since the 1960s it has grown and covers various numbers of functional areas such as managing raw materials and inventory, handling of work in progress, storing and delivering of finished goods. It also includes customer service, demand forecasting, plant/warehouse site selection, traffic and transportation. Since it has an effect on most of the activities held within an organization, it has a great influence on the profits made. A recent US study found that logistics accounts for 10% of the Gross Domestic Profit (GDP) and that approximately 56 cents out of every dollar of revenue is spent on managing the purchasing of goods and services.  The process is lengthy but once handled right can run very smoothly and can prove very beneficial to the organization.

An organization cannot be competitive and strive in this fiercely competitive corporate world till it delivers end products or services of the desired quality to its customers at the right time, right place and at a price the customer feels is reasonable. The way to sustainable competitive edge lies in improving logistics. Therefore to maintain profit earnings, it is important for firms to manage logistics efficiently.

If a chosen supplier fails to deliver the required raw material of an agreed-on quality level at the right time then the firm will incur additional expenses in the form of higher scrap rate, wastage and direct labor. Prompt delivery is required to avoid costly rescheduling of production otherwise efficiency will be decreased.

In order to maintain profit levels it is important for firms not only to satisfy customers but to delight them. This again becomes a part of the organizations logistics. To achieve this not only fast and reliable delivery of high quality goods but also innovative design and distribution of ideas is essential. Firms stress on logistics to create differentiation by providing its customers with unique products that are difficult to be imitated by competitors.

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Logistics is considered as the last point of contact between the organization and its customer and so leveraging successful logistics leads to cost reduction, increased customer satisfaction and market share and so eventually higher profits. Low total product or service cost is significant in logistics so that the firm can have a competitive edge in the market.

There are many opportunities to achieve dramatic cost savings but to achieve this, vision and hard work is required. Firms can do this by coordinating the different parts of the supply chain. Departments within firms such as procurement officer, manufacturing, legal and R&D managers need to work in a cross-functional manner and promote joint cost-saving projects.

One of the biggest opportunities for cost saving is to reduce the amount of inventory which will automatically drive costs down. This can be done by Just-in-time inventory management that emphasizes on continuous improvement. For this, it is important for firms to develop strong relationship with few, reliable suppliers who deliver raw material in time.  Also Economic Order Quantity (EOQ) model, one of the common techniques is used to control inventory.

Outsourcing is often used to transfer some of the internal activities of a firm to an outside vendor to achieve greater efficiency and specialization. It is also used as a technique to meet unexpected demands that firms cannot handle.

Wastage can be eliminated through focus on what the customers want. This can be done by continuous improvement using Lean Production. It emphasizes on customer focus.

Greater efficiencies can be accomplished through use of technology tools that can enable the purchase of low value, low risk goods and services. With the usage of database systems, unnecessary paper work can be eliminated, and real time data can be accessed.

Use of E-Commerce to track inventory and coordinate pickup and delivery for end customers can be a great cost saving opportunity. This has been adopted by Cisco and FedEx.

Different alternatives of distribution means such as trucking, airfreight, shipping, and railroads should be constantly evaluated. Use of Excel OM and Production and Operation Management (POM) for Windows’ enables firms to correctly plan for the forecasted demand. Further, software like Enterprise Resource Planning (ERP) including Supply Chain Management (SCM) and Customer Relationship Management (CRM) provide firms with great opportunity to save on costs.

Gantt Charts are useful for loading and scheduling. It prevents firms from unnecessary delays in work.

Quality is one aspect that firms emphasize on due to growing awareness for better quality goods amongst customers. This can be done by implementing Total Quality Management (TQM), meeting quality standards developed by International Standards Organization (ISO) and by adapting to Six Sigma and Plan-Do-Check-Act (PDCA) model.

Mentioned above are some of the greatest costs saving opportunities in today’s world.

References

Lambert, D.M; Stock, J.R. and Ellram, L.M., (1998). Fundamentals of Logistics Management. Burr Ridge, IL: Irwin McGraw-Hill.

http://www.mhhe.com/business/management/leenders12e/information/leenders_ch01.pdf

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