T.C.
ISTANBUL COMMERCE UNIVERSITY FOREIGN TRADE INSTITUTE
DEPARTMENT OF INTERNATIONAL TRADE INTERNATIONAL TRADE MASTER PROGRAM
The Impact of Logistics Performance on Foreign Trade Volume
Master Thesis
Youness Abara
Istanbul, 2022
T.C.
ISTANBUL COMMERCE UNIVERSITY FOREIGN TRADE INSTITUTE
DEPARTMENT OF INTERNATIONAL TRADE INTERNATIONAL TRADE MASTER PROGRAM
The impact of logistics performance on foreign trade volumes
Master thesis Youness Abara
Advisor: Doç. Dr. Mustafa Emre CİVELEK
Istanbul, 2022
III
ABSTRACT
The logistics performance in a country plays an essential role in both economic and social development, therefore examining the relationship between logistics performance and foreign trade volume would contribute to the literature. The logistics performance index and foreign trade volume data have been analyzed. The LPI data was obtained from the World Bank data which is published every two years. And, foreign trade volume data was obtained from World integrated trade solution data. Using the collected data, a regression analysis was performed by using SPSS. As per the analysis results, the impact of logistics performance on foreign trade volume is statistically highly significant.
Consequently, it could be suggested that the logistics ability of a country triggers the increase of foreign trade volume.
Keywords: Logistics, LPI, Foreign trade, FTV, Transport
IV
ÖZET
Bir ülkedeki lojistik performansın hem ekonomik hem de sosyal kalkınmada önemli bir rol oynadığından, lojistik performans ile dış ticaret hacmi arasındaki ilişkinin incelenmesi literatüre katkı sağlayacaktır. Lojistik performans endeksi ve dış ticaret hacmi verileri analiz edilmiştir. LPI verileri, iki yılda bir yayınlanan Dünya Bankası verilerinden elde edilmiştir. Dış ticaret hacmi verileri ise Dünya entegre ticaret çözümü verilerinden elde edilmiştir. Toplanan veriler kullanılarak SPSS kullanılarak regresyon analizi yapılmıştır. Analiz sonuçlarına göre lojistik performansın dış ticaret hacmi üzerindeki etkisi istatistiksel olarak oldukça önemlidir. Sonuç olarak, bir ülkenin lojistik kabiliyetinin dış ticaret hacminin artışını tetiklediği söylenebilir.
Anahtar Kelimeler: Lojistik, LPI, Dış ticaret, FTV, Taşımacılık
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FOREWORD
First of all, I would like to thank my advisor Doç. Dr. Mustafa Emre CİVELEK for his help and advice in every step during writing my thesis, to be honest, I have benefited greatly from all teachers.
Those two years were important in building my career.
Finally, I would like to express my endless thanks to teachers, friends, and my family who have been with me in my life and during my graduate studies.
To My Family….
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TABLE OF CONTENT
ABSTRACT ... III ÖZET ... IV FOREWORD ... V TABLE OF CONTENT ... VI FIGURES ... IX TABLES ... X
1 INTRODUCTION ... 1
2 LITERATURE REVIEW ... 2
Definition of logistics ... 2
Logistics from historical perspective ... 2
Components of Logistics System ... 7
Phases of logistics ... 9
2.4.1 Logistics as a functional specialization ... 10
2.4.2 Logistics as a coordinative function ... 11
2.4.3 Logistics as an enabler of process orientation within the firm ... 12
2.4.4 Logistics as a supply chain management ... 13
Performance effects of logistics development ... 15
Strategy and logistics: ... 15
2.6.1 Differentiating the strategy ... 16
2.6.2 Logistics strategy: ... 16
Emerging Trends in Logistics ... 17
The Role of Logistics in the Economy and in the Organization ... 19
Principle and functions of logistics: ... 25
The role of logistics on trade: ... 26
2.10.1 Logistics performance: ... 27
2.10.2 Logistics performance effects on trade: ... 28
The components of logistics activities ... 31
2.11.1 Customer service... 31
2.11.2 Transport ... 32
2.11.2.1 Road transport: ... 33
2.11.2.2 Maritime transport: ... 33
2.11.2.3 Airways transport ... 34
2.11.2.4 Railway transport: ... 35
VII
2.11.2.5 Pipeline transport ... 35
2.11.3 Storage ... 36
2.11.4 Handling ... 36
2.11.5 Demand forecasting and production planning: ... 36
2.11.6 Customs clearance: ... 37
2.11.7 Insurance: ... 37
2.11.8 Packaging: ... 38
2.11.9 Order processing: ... 38
2.11.10 Inventory management: ... 39
Principles of logistics: ... 39
2.12.1 Standards principle: ... 39
2.12.2 Economic principle: ... 40
2.12.3 Sufficiency principle: ... 40
2.12.4 Principle of elasticity: ... 40
2.12.5 Simplicity principle: ... 40
2.12.6 Coordination and cooperation principle: ... 40
Economic effects of logistics: ... 40
The relationship between the logistics performance and exports: ... 41
Transportation and logistics: ... 42
2.15.1 The effects of transportation on logistics: ... 43
2.15.2 The Role of Transportation in Service Quality ... 43
3 CONCEPTUAL FRAMEWORK ... 43
Logistics performance index ... 44
The role of LPI ... 46
International LPI ... 46
Domestic LPI ... 46
Construction of LPI ... 47
LPI and other index’s ... 47
3.6.1 Global Competitiveness Report and Index (GCI) ... 48
3.6.2 Environmental Performance Index (EPI) ... 49
3.6.3 Corruption Perception Index (CPI) ... 49
Foreign trade volume ... 50
3.7.1 Definition of foreign trade ... 50
3.7.2 Reasons for foreign trade: ... 55
3.7.3 History of foreign trade: ... 55
3.7.4 Types of foreign trade: ... 56
3.7.5 Characteristics of foreign trade ... 56
3.7.6 Benefits of foreign trade ... 57
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3.7.7 The importance of foreign trade in terms of economy ... 58
3.7.8 Foreign trade theories ... 58
3.7.8.1 Mercantilism ... 58
3.7.8.2 Absolute Advantage Theory ... 60
3.7.8.3 Comparative Advantage Theory ... 61
3.7.8.4 Factor Endowment Theory ... 62
3.7.8.5 New Foreign Trade Theories ... 64
3.7.9 Foreign Trade Policies ... 68
4 RESEARCH METHODOLOGY ... 72
Research Approach ... 72
Research purpose ... 72
Data collection ... 72
5 DEVELOPMENT OF HYPOTHESES AND CONCEPTUAL MODEL ... 74
The relationship between logistics performance and foreign trade volume ... 74
Conceptual model of the research ... 76
6 DATA ANALYSIS RESULTS ... 76
Analysis method ... 76
Hypothesis tests ... 77
7 THE CONTRIBUTIONS AND CHANGES OF THE RESEARCH ... 78
Discuss results ... 78
Limitations of Research and Advanced Research ... 79
8 CONCLUSION ... 80
9 REFERENCES... 81
IX
FIGURES
Figure 1 Logistics historical development ... 3
Figure 2 Overview of Logistics System (source: BTRE, 2001) ... 8
Figure 3 the four phases of logistics development (WEBER 2002, p: 5) ... 9
Figure 4 Regression Analysis Hypothesis... 76
X
TABLES
Table 1 Top 10 countries in LPI scoring between 2010 and 2018 ... 45
Table 2 Data of the 10 countries with the highest export figures (USD) ... 52
Table 3 Data of the 10 Countries with the Highest Imports (USD) ... 53
Table 4 Foreign Trade Volumes of the 10 Countries with the Highest Foreign Trade Volume (USD) ... 54
Table 5 Hypothesis ... 75
Table 6 Regression Analysis ANOVA Table ... 77
Table 7 Table of Regression Coefficients ... 78
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ABBREVIATIONS
LPI : Logistics performance index
FTV : Foreign trade volume
GATT : General Agreement on Tariffs and Trade CLM : Council of Logistics Management
CSCMP : Council of Supply Chain Management Professionals
SCM : Supply chain management
LSPs : Logistics Service Providers EDI : Electronic data interchange GIS : Geographic information systems GPS : Global positioning systems B2B : Business-to-business
B2C : Business-to-consumer
B2L : Business-to-logistics 3PL : Third party logistics
SPSS : Statistical Package for the Social Sciences
GCI : Global Competitiveness Index CPI : Corruption Perception Index
EPI
: Environmental Performance Index
1
1 INTRODUCTION
Trade is now more crucial than ever because of globalization. Even the nations with which they trade are always in rivalry. The competitive power of the entire globe is expanding as awareness grows.
The effect of the investments made in the field of logistics on the foreign trade volume of the countries constitutes the main purpose of this research. In this context, by examining the logistics performance index (LPI) data and foreign trade volume data of 122 countries in 2010, 2012, 2014, 2016, and 2018 were compared. While explaining the concepts, the research was detailed by mentioning the sub-headings of logistics and foreign trade. This research aims to contribute to the literature scientifically.
The logistics sector developed slowly until the 1950s and was defined only as transportation, aimed to liberalize trade between countries with the General Agreement on Tariffs and Trade (GATT) established in 1948. Trade restrictions have been largely lifted. With the liberalization of international trade, developments in the commercial field have increased. Due to these developments in the commercial field, there has been a rapid development in the field of Logistics and new definitions have been added to Logistics. In the new commercial system, logistics are included in all interconnected movements that take place both before and after production. Logistics has reached a much wider dimension, from the receipt of customer orders to the collection of product prices, to the integrity of customs and transit documents within the framework of service. Considering that the logistics sector is one of the most effective functions of international trade, this development has been inevitable.
With the spread of the internet in the world, logistics elements have been moved to the electronic environment and transactions have become faster and more practical.
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2 LITERATURE REVIEW
Definition of logistics
Logistics covers the functions of transport, storage, handling, and production, tends to extend its domain to purchasing and supply, downstream to business management and distribution. The definition of military origin is often quoted: "Logistics is about bringing what is needed, where it is needed and when it is needed. »
However, logistics has several services by their object and their methods:
Supply logistics that provide factories the basic products, components, and sub- assemblies necessary for the production.
A general supply logistics which provide services companies or administrations with the various products they need for their activity (office supplies for example).
Production logistics which bring the materials and components necessary for production and planning production; this logistics tends to absorb the entire production management.
Distribution logistics that of distributors, which consists in providing the end consumer, either in large retail outlets or at home in VAD for example, the products he needs.
Military logistics aimed at transporting the forces and all that is necessary for their operational implementation and support to a theatre of operation.
Support logistics born in the military but extended to other sectors, aeronautics, energy, industry, etc., which consists of organizing everything necessary to keep a complex system in operation, including through maintenance activities.
Logistics from historical perspective
Logistics started to gain importance with the military, but this does not mean logistics started with the military. In ancient times, there was a requirement for containing and transporting local food supply, tools that are both used for harvesting, collecting food, and for other purposes. Therefore, it can be concluded that logistics is a necessity that comes with human beings.
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Logistics as an absolutely necessary component in the development of human society has been fully proven since ancient times and as an example is the period of 2700 BC which can be considered a turning point in the development of logistics, handling technologies for materials, and last but not least the building systems that were used to build pyramids. Shaped stone blocks well thought and weighing tens of tonnes were prepared on several sites, then transported and assembled on the site dedicated to construction (Cuturela, 2013). A small example related to pyramids supports that logistics was always in the picture for humans and has its own importance through time whether it’s called logistics or not.
Figure 1 Logistics historical development (BTRE.2001)
Before the 1950s, logistics was thought of in military terms. It had to do with procurement, maintenance, and transportation of military facilities, materiel, and personnel (Ballou, 2007). All these military aspects of logistics caused the emergence of business logistics. The reason lies behind the examining military first is earliest work concerning logistics originated in military writings. Tzu (1983) specifically identifies various types of supply and/or logistics depending on specific translation in approximately 500 BC. In the military, logistics was a base for planning before the beginning of war times. It basically took relevant decisions regarding supplies, support factors, and speed based on the aim of operations and capacities. Logistics was important because it was perceived as a source of power for
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armies and Taylor (2008) quoted that Frederick II of Prussia writes in 1747 at Instruction for his General “Without supplies, no army is brave”.
Military examples are crucial to understanding the roots of business logistics because business logistics is a spin-off from military logistics. Examples from Alexander the Great, Romans, World War I, and II are examined. According to Shutherland (2008) Logistics especially before the heavily technologized wars were a decision mechanism about winners of the war.
Alexander the Great and his father recognized the importance of logistics in winning a war in terms of providing solutions to limited mobility of their sources and used logistics to exploit enemies’ weaknesses to have the upper hand in the war.
Alexander the Great noticed how using additional tools to carry supplies of soldiers such as weapons and armors slowed down the army and made soldiers carry their own supplies. Alexander also made extensive use of shipping, with a reasonably sized merchant ship able to carry around 400 tons, while a horse could carry 200 Lbs (but needed to eat 20 Lbs of fodder a day, thus consuming its own load every 10 days) (Sutherland, 2008).
World War I was an exceptional situation for the world and it was something no one ever faced before. There were two major problems with logistics in the World War I one of them was the underestimated supply numbers and another one was the size of the war area. World War I was a milestone for military logistics. It was no longer true to say that supply was easier when armies kept on the move due to the fact that when they stopped they consumed the food, fuel, and fodder needed by the army (Sutherland, 2008). However, with the scope of the war, the situation was reversed and it became harder and harder to supply troops in the move. Before the world shake of the effects of World War I, World War II has started. It was a testing stage for the world in terms of logistics. Petroleum access was one of the main factors that shaped the war because every supply transportation based on petroleum usage such as railroad, motorized components, etc.
In this environment business logistics also started to improve. Logistics, then known as physical distribution, first appeared in the academic literature in the early 1900s.
Only a few articles discuss the history of logistics thought and/or practice. In the beginning, business logistics were only based on transportation and it was not
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perceived as an important part of the business because of the abundant resources and demand that came after WWII. During the 1950s, transportation was the emphasis.
Several university programs offered transportation majors. However, the topics of logistics, physical distribution, physical supply, and supply chain management were not included in these programs (Southern, 2011). In this era, calculations required in logistics were especially difficult because there was no electronic equipment that is useful in logistics. Another obstacle in the improvement of logistics was the influence of governmental constitutions. For example, in the USA federal government only decided to promulgate the Federal-Aid Highway system in 1956.
One of the improvements logistics business was the book “Economics of Transportation” written by D. Philip Locklin in 1954 and it was one of the first textbooks for academic literature of logistics.
In the 1960s, demand slowed, competition increased and companies realized that have to cut costs. Logistics cost were high at that time and heavily regulated in countries like the USA. For example, in the USA logistics cost approximately accounted for %15 of GDP, in the UK it was around %16, in Japan %26.5, in China
%24, and in Australia around %24. On an individual firm level, they could be as high as 32 percent of sales (LaLonde and Zinzer, 1976). With the understanding of how high logistics costs can be, companies started to focus on physical distribution processes from outbound logistics activities. Physical distribution was already a part of marketing which is an essential business activity at that time and it was the main cost generator for the firms. Almost two of third of costs are generated by physical distribution. After the focus on outbound activities, companies realized their inbound activities are almost as important as outbound activities. At that time one of the definitions of logistics was made by Smykay in 1961 as “Physical distribution can be broadly defined as that area of the business manager responsible for the movement of raw materials and finished products and the development of movement systems.”
In the 1970s, emphasis was on physical supply and deregulation of logistics. The inbound side of logistics started to gain importance in this era and physical distribution (outbound logistics) and physical supply (inbound logistics) were combined. In the 1970s, governments were also started to support logistics activities.
For example, in the USA government established a railroad transportation firm (AMRAK) to improve transportation and other deregulatory rules were applied. The
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term physical distribution began to be phased out during the 1980s, and the term logistics was emphasized. As an example, James C. Johnson and Donald F. Wood changed the name of their textbook Contemporary Physical Distribution to Contemporary Physical Distribution and Logistics (Johnson and Wood 1982). The NCPDM changed its name to the Council of Logistics Management (CLM) in 1985 (Southern, 2011).
The 1990s was a game-changer era for business including logistics due to the emergence of electronics and internet systems. With the electronics and internet systems globalization is also increased which affects demand for logistics. Another important change for the 90s was the increase in third-party logistics companies.
After the middle of the 90s, the supply chain was emphasized more and more.
The supply chain was the main concept for the 2000s, medium and small enterprises also started to focus on the supply chain. The CSCMP defines supply chain management as follows: “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities” (CSCMP 2010).
The logistics sector is expressed as a locomotive in the development of countries.
Since it is difficult to calculate the size of the sector because it covers many activities, it is thought that the world logistics market reached 5 trillion dollars in 2006. The logistics sector is among the fastest-growing sectors with annual growth rates of 7-9% in Europe, 15% in North America, and 20% in Asia. Leading countries in the logistics sector are the USA, UK, Japan, Netherlands, Germany, France, Hungary, and Bulgaria. More than 50% of the world's logistics market, outside of the US and Europe, cities such as Hong Kong and Dubai have recently been trying to become logistics bases. Asia-Pacific, Eastern Europe, Russia, and the Middle East will be the regions to be increased in the future (PricewaterhouseCoopers, 2010).
Developments in the logistics sector and global scale transportation are gaining more importance in the rapidly developing world. When examined by industry, the logistics sector contains many areas closely related to each other, and real and clear statistical information cannot be obtained because it is in the service sector structure.
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Components of Logistics System
The logistics system is depicted in Figure 2 as a whole. The three components of this system are logistics services, information systems, and infrastructure/resources, and they are all interconnected. The following is how the three major components of the logistics system interact.
Logistics services help carry resources and goods from inputs to outputs, as well as waste disposal and reverse flows. They comprise actions carried out in-house by service users (for example, storage or inventory management at a manufacturer's facility) as well as operations carried out by third-party service providers.
Logistics services include both physical and non-physical operations (e.g., transportation and storage) (e.g. supply chain design, selection of contractors, freightage negotiations). The majority of logistics services operations are bi- directional. Modeling and decision-making management are key aspects of information systems, as are tracking and tracing. It delivers critical information and advice at every stage of the interaction between logistical services and the target stations. Human resources, financial resources, packaging materials, warehousing, transportation, and communications are all part of the infrastructure. The majority of fixed capital is used to construct these facilities. Within logistical systems, they are strong foundations and basements.
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Figure 2 Overview of Logistics System (source: BTRE, 2001)
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Phases of logistics
The majority of concepts suggest that logistics develops in three or four different phases (Weber 2002; Bowersox & Daugherty 1987), however, the most advanced two phases are frequently considered as a single-phase alone. These phases are defined by the amount of logistics knowledge existent in a business, as shown in Figure 3 (Weber 2002, p. 5), and need route-dependent growth from the lowest to the greatest level of logistics knowledge.
Figure 3 the four phases of logistics development (WEBER 2002, p: 5)
Efficiencies in logistical operations are stressed in the first two phases, both via specialization and cross-functional coordination of material flows.
The breadth of logistics changes dramatically as you get to the third and fourth phases. It becomes a management role whose goal is to adopt a flow- and process- oriented mindset throughout the company, promoting logistical thought and action beyond the logistics department's primary responsibility. However, Weber (2002, pp.
3–4) points out that even when a company has progressed to the upper stages of logistical growth, it is critical that lower-level operations be not overlooked.
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The various stages of logistical growth reflect an underlying significance shift. The flow of information in logistics operations is becoming increasingly important as a result of a focus on traditional logistical tasks like transportation, handling, and warehousing. While the physical capabilities of a logistics system defined its potential in the early years of logistical development, this has altered to the point where the capabilities of complementing information exchange systems are now of at least equal significance.
In the following chapters, the different phases of logistical development will be shown in greater detail.
2.4.1 Logistics as a functional specialization
During the first phase of its growth, logistics is a specialized activity that provides services and processes to ensure the effective movement of resources and commodities.
These procedures primarily include the transportation, processing, and storing of items that had previously gone unnoticed.
A significant upheaval in the market environment in the 1950s triggered the formation of the first phase of logistical development. Traditional supplier markets become buyer markets, necessitating new and more complex material and product flows. The logistics function, in comparison to other areas such as procurement or manufacturing, was undeveloped at the time, and logistics duties were dispersed across the company. As a result, focusing on the optimization of this function revealed a lot of opportunities for improvement.
Two distinct benefits may be gained via functional specialization, either through the direct optimization of individual processes or through the combined treatment of several processes. Improvements in the process level might be the consequence of experience curve effects or economies of scale, according to Wallenburg (2004, p.40). Additionally, efficiency benefits can be obtained at the planning level by utilizing mathematical approaches to solve non-trivial transportation and storage challenges, for example. Beyond these enhancements, combining the optimization of several logistical operations has tremendous promise, which can only be realized if existing interdependencies are taken into consideration, for example, when increased
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transportation costs are compensated by decreased inventory levels, the result is a net gain.
On an organizational level, a specialization of the logistics function frequently leads to the creation of new departments that combine the tasks of transportation, handling, and warehousing. Simultaneously, a functional split may frequently be seen across the board, resulting from distinct activities in procurement, manufacturing, and distribution logistics. Logistics, as a specialized service activity, is distinguished by the presence of significant know-how distributed among a clearly defined set of people.
In conclusion, learning and comprehending the needs of the first phase of logistical development offers significant benefits and efficiency gains while also serving as the required foundation for the subsequent phases.
2.4.2 Logistics as a coordinative function
Following the exhaustion of rationalization opportunities in the first phase, particularly in the distribution and transportation-intensive procurement operations, the second phase of logistical development focuses on the coordination of various functions. The efforts are focused on both coordinating the flow of resources and commodities from source to sink and broadening the focus to include the whole supply chain, which spans the firm's boundaries and includes both consumers and suppliers.
The insufficient assessment of existing interdependencies between different activities of the company was the starting point for viewing logistics as a coordinative function. Procurement, production, and distribution functions were all optimized separately, thanks to existing structures. However, historically, the organizational separation of these roles fostered the growth and nurturing of individual interests, hindering overall process optimization. However, the latter was required since the optimization potentials for single functions owing to specialization had already been exhausted. As a result, improvements may be made during the second phase of logistical growth by focusing on the coordination of various tasks. Weber (2002, p.
11) gives examples of lot size coordination and just-in-time supply and manufacturing, in which the appropriate resources are delivered exactly when they
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are needed. Cost and performance gains occur as a result of the procurement and production divisions' integrated understanding and planning.
The emphasis is thus on influencing the scope and structure of logistical service demand through proper coordination. As a result, logistics is focusing on integrated processes rather than the prior functional isolation.
On the one hand, this fundamental shift in the way logistics is seen leads to increasing heterogeneity in the function, while on the other; it necessitates more contact with the responsible management of other activities. During the second phase of logistical development, logistics becomes more important since it is now regarded as a way to gain competitive advantages. During this phase, the major focus is on enabling cost leadership; differentiation via performance will be prioritized in the subsequent phases. The second phase builds on the functional specialization's expertise, complemented by significant inter-organizational and managerial expertise required for coordination. As a result, not only the breadth but also the depth of the required logistical expertise expands.
2.4.3 Logistics as an enabler of process orientation within the firm
The move from the second to the third phase of logistical growth is marked by a shift in the importance attributed to it. Logistics has evolved into a management role, with the goal of integrating the notion of flow orientation throughout the organization.
Historically, the shifting economic situation has been the catalyst for this evolution.
As competition became more intense, it became necessary to differentiate while lowering costs. The merely functionally built buildings and systems become irrelevant as a result. Complexity reductions might be accomplished by having a greater process orientation while delivering logistical services, better meeting the changed demands of customers.
The adoption of flow orientation is not limited to particular business activities due to the move into a management role. In contrast to the coordination-based approach of the second phase, all logistical structures are typically seen as flexible. As a result, when the notion of flow orientation is implemented, the original logistical activities of transportation, handling, and warehousing lose their prominence. Their continued
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relevance stems from their contribution to the smooth operation of the firm's flow orientation.
As logistics becomes more important as a management function, so does the amount of logistical knowledge required. Simultaneously, the broad logistical knowledge gained in the early phases allows for a decrease in the varied specialties on the various logistics functions. For example, logistical services can now be given by the same workers who supply manufacturing or maintenance operations.
In practice, corporate logistics that follow this idea are sometimes chastised because they may fail in some of their most fundamental features (Weber 2002, p. 19): one risk is that the larger orientation will suffocate the distinctive and original logistical talents.
When logistics becomes a management function, on the other hand, it runs the danger of not being properly rooted in the company. As a result, when a company enters the third phase of logistical development, functional specialization does not have to be abandoned. Rather, a solution must be found that allows and encourages the coexistence of functional specialization for the provision of logistical services while also establishing the awareness that flow orientation is a critical management responsibility.
2.4.4 Logistics as a supply chain management
During the fourth and final phase of logistical evolution, logistics continues to be a management function, but it now goes outside the firm's borders. As a result, the concept of process or flow orientation has been expanded across the supply chain, now including suppliers and consumers, ideally reaching from source to sink. During this era of logistics, which is today known as supply chain management (SCM), the goal is to integrate the whole supply chain.
This interpretation of supply chain management as a stage of logistical growth is not without merit. As Larson and Halldorsson (2004, pp. 1-7) note out, there are fundamentally four main perspectives of SCM that have emerged through time in the logistics science community. These include the "traditionalist" perspective, which sees SCM as a subset of logistics, and the "unionist" view, which sees SCM as a
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subset of logistics. Furthermore, the "re-labeling" viewpoint assumes that what is now SCM was formerly logistics.
Finally, the fourth and "intersections" perspective proposes that logistics is more than a synthesis of logistics, marketing, operations, buying, and other disciplines, but rather incorporates strategic and integrative aspects from all of them. Bechtel and Jayaram (1997), who present a thorough retroactive assessment of the literature and research on supply chain management, provide more insights on the range of understandings.
In light of this diversity of viewpoints, it's critical to clarify that supply chain management is regarded as the most advanced phase of logistic development in this study.
The need for greater efficiency and effectiveness by businesses served as the catalyst for the creation of supply chain management. Because most internal optimization opportunities have previously been explored, only those resulting from inefficient collaboration between businesses in the same supply chain remained. The fact that individual company borders lost some of their prior dominance throughout this phase was largely enabled by the great development achieved in information and communication technology.
Despite the fact that supply chains are a feature of any economy based on the division of labor and thus existed during the previous phases of logistical growth, it is only in the fourth phase that they get widespread recognition. Thus, the focus on the supply chain and the introduction of inter-organizational concepts aimed at realizing optimization potentials through efficiency and effectiveness improvements are new to this phase.
The implementation of inter-organizational supply chain management is accompanied by management challenges due to the task's high complexity and diverging objective functions. While low-intensity partnerships generally focus just on ensuring an adequate flow of information, rising intensity necessitates structural and process changes to prepare previous internal structures, for now, inter- organizational issues.
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During this phase of logistical growth, management duties are many and difficult.
They are the reason why supply chain management is its own phase of logistical growth, along with knowledge of the necessity for inter-organizational collaboration for supplying products and services. The ability to respond to technology demands, as well as the willingness and capacities of the participating businesses, are both required for the implementation of an inter-organizational flow orientation.
Performance effects of logistics development
As previously stated, tremendous progress has been made in the sector of business logistics in recent years. However, whether it is desirable for each individual business to strive for as high a degree of logistics development as feasible and to implement logistics as a management function, allowing for inter-organizational flow direction, remains an open topic. This will only be the case if flow orientation is shown to be a significant performance driver in both logistics and company performance.
Dehler (2001, pp. 220-226) shows experimentally that a firm's logistics performance improves as its flow orientation increases, owing to lower logistical costs and greater levels of logistics service.
This is especially important because Dehler (2001, pp. 233-244) also finds that logistics success has a direct impact on entire company performance, and therefore on total financial performance. Increased levels of logistics services, on the other hand, have a substantially bigger total effect since they affect the firm's adaptability as well as its market performance, both of which have a major impact on financial success.
Strategy and logistics:
he logistics strategy is a collection of guiding principles, driving forces, and ingrained attitudes that enable partners throughout the network coordinate goals, plans, and policies, reinforced by conscious and subconscious behavior inside and between partners (Hayes and Wheelwright, 1984).
Whittington (2000) proposes four approaches to setting strategy. He started by suggesting different motivations for setting strategy: -How deliberate are the processes of strategy setting? These can range from clearly and carefully planned to a series of decisions taken on a day-to-day basis.
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-What are the goals of strategy setting?
These focus on maximizing profit to allowing other business priorities such as sales growth to be included (Harrison and Van Hoek, 2008).
2.6.1 Differentiating the strategy
A supply chain might also choose to compete based on other criteria. As a result, such factors must be recognized and included into the commercial business plans of all network participants.
The options so made have predominant implications for the operation of each member. Failure to understand competitive standards and their implications for a given product or service via any member potential that the supply chain will compete for much less effectively.
Porter (1985) cites the following five concepts of strategic positioning in relation to logistics strategy:
- A distinct value proposition: determining what distinguishes the product/service from its rivals.
- A customized supply chain: governed by order fulfillment and qualification requirements.
- Define the trade: this entails deciding not just on objectives, but also on what not to do. A responsive grant chain is no longer compatible with a productive supply chain (Fisher, 1997).
- Align logistical processes such that they reinforce one other.
- Consistency: Over time, logistical strategies are continually and consistently multiplied. To emphasize how difficult it is to distinguish between techniques.
2.6.2 Logistics strategy:
Today innovation management in logistics has come to be a vital place with increasing competition. Although they as mentioned developments like globalization and outsourcing provide growing demands in logistics and two only low-income margins exists because new Logistics Service Providers (LSPs) are continuously
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coming into the market. While the opposition is developing rapidly, innovations offer a way to distinguish themselves positively from their rivals in order to enlarge their market share in logistics.
While achieving the provider-level objectives, the science of evaluating the most economical methodology in the distribution of goods to the market is logistics. When an organization creates a logistics strategy it is denying the provider stages at which its logistics agency is at its most fee effective.
Because provide chains are constantly altering and evolving, a company can also increase the number of logistics strategies for unique product lines, unique countries, or specific customers.
In a number of sources, the logistics strategy of a focal business enterprise is referred to as a supply chain strategy. The method of the center of attention company, and then the supply chain strategy, relies upon the commercial enterprise philosophy. In order to shape a logistics strategy, it is additionally necessary to understand the shoppers and the uncertainty in the furnish chain. Segmentation is carried out to better recognize the consumers. To advance a logistics strategy, it is important that segmentation is now not exclusively marketing, it also is relevant in the area of logistics. For example, buyers can be divided into corporations depending on the time of ready for an order or sensitivity to the value of offerings or from some other widespread for logistics signs. Uncertainty is also a vital component affecting the logistics strategy. Thus, with excessive uncertainty, it is imperative to grant for reserve capacities, reserves, and locations of their deployment, a time reserve. In addition, with uncertainty, a great deal of attention is paid to working out the problems of interplay and coordination of companions in the grant chain (Martí et al., 2014).
Emerging Trends in Logistics
The demand for consistent product solutions throughout all areas of the world has increased as a result of the globalization of the multinational client. As a result, in order to satisfy consumer needs, build a worldwide supply base, and posture against growing competitors, it is necessary to globalize logistics capability.
The growth in the number of firms functioning in the global market place has been a significant development in recent years. When functioning as a worldwide firm, this
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demands a larger viewpoint. In the latter case, even though a company's presence spans a large geographic area, it is supported on a local or regional level through sourcing, production, storage, and distribution. In the first case, the firm is really worldwide; with a structure and policy that reflects it.
According to Canci & Erdal (2004), in order to service global markets, logistics networks must become considerably more expensive and complicated. Once again, logistics must be planned and managed as a whole system. In addition to the above described characteristics, firms operating in a worldwide market area are frequently involved in outsourcing.
The major logistics implications of globalizations are; extended supply lead times, extended and unreliable transit times, multiple break bulk and consolidation options, multiple freight mode and cost options, production postponement with local added value.
According to Ghiani, et al (2005) in recent years, several strategic and technological changes have had a marked impact on logistics. Among these, three are worthy of mention: globalization, new information technologies and e‐commerce. Below are the expressions of Ghiani, et al (2005) concerning these three impacts.
A growing number of global businesses are taking advantage of lower production prices and low-cost raw materials accessible in some regions. Acquisitions or strategic relationships with other companies are occasionally used to accomplish this.
The need for transportation has risen as a result of globalization. More parts and semi-finished goods must be transported between manufacturing locations, and transportation to markets is becoming increasingly complicated and expensive.
Globalization has resulted in a rise in multimodal container shipping.
The worldwide participants, such as suppliers and manufacturers, should be well- versed in information technology. They utilize electronic data interchange (EDI) to communicate information on stock levels, delivery schedules, and the location of in- transit products in the supply chain, among other things. Geographic information systems (GIS), global positioning systems (GPS), and on board computers allow dispatchers to track the current location of trucks and interact with drivers at the operational level. Firms engaged in express pick-up and delivery activities, as well as
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long-haul transportation enterprises, require such firms engaged in express pick-up and delivery activities, as well as long-haul transportation enterprises, require such technology.
A growing number of businesses are conducting business through the internet.
Business-to-business (B2B) and business-to-consumer (B2C) transactions are frequently distinguished. E-commerce is growing at the same time as globalization and information technology. As a result of ecommerce, the number of products exchanged between producers and merchants should decrease, while more direct deliveries between manufacturers and end users should increase.
Ecommerce necessitates a more sophisticated structure of the complete logistics system (elogistics), which must be capable of handling small and medium-sized shipments to a huge number of clients, some of whom are located all over the world.
In addition, the flow of faulty (or rejected) items becomes a significant concern (reverse logistics).
IT and globalization have a reciprocal impact, and they are determining the competitive advantage for the time being. Further IT applications will alter business capabilities, which will have an impact on global positioning and competitiveness.
As a result, IT investment is critical in making the world a click away. We shall experience business-to-logistics (B2L) in the near future, which is a merger of ecommerce and logistics.
These trends that effect logistics, also have a great impact on the role of the logistics in the economy and in the organization. As logistics improved with the effect of globalization the positive economic growth also reflects to the economies. Also within the integration of IT structures (e‐commerce & e‐logistics) efficient relationship and cost minimization can be achieved in the organizations.
The Role of Logistics in the Economy and in the Organization
In the context of business and the economy as a whole, logistics might be examined.
Logistics is a vital activity that makes significant use of the people and material resources that impact the economy of a country.
According to Lambert et al. (2004), logistics plays an essential role in both the economy and the organization. According to their results, logistics play an important
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role in the economy in two ways. For starters, logistics is a key company expense that influences and is influenced by other economic activity. Logistical contributes significantly to the economy as a whole by increasing the efficiency of logistics operations.
Secondly, logistics facilitates the movement and flow of numerous economic transactions; it is a critical activity in the selling of almost all products and services.
Consider this function from a system perspective: if items do not arrive on time, customers will be unable to purchase them. No transaction may be made if the items do not arrive in the right location or condition. As a result, all economic activity along the supply chain will be harmed.
Another significant function that logistics plays in the economy is that it serves as a vital facilitator of a company's effectiveness. As vital as market products are dependable and qualified logistics services in the globalization process. As previously said, it makes no difference how well-made the items are if they are not delivered on time.
Market pricing is made up of demand and supply sides in economic literature. The market price is determined by the agreed-upon supply and demand sides. In other words, if the agreed-upon supply is available on the market at the specified time, the agreed-upon demand will be met. However, if logistics are inefficient and supply is unable to be on the market at the specified transaction time, demand shifts its focus to the opposite supply side (the other supplier). The other provider in this case is a supplier from a different economy. Along with corporations, governments are competing in the fast-paced globalization process. This rivalry has an impact on economies. It is clear that logistics has become a weapon in every economy.
During the 1970s, rising interest rates and growing energy costs drew increased attention to logistics as a cost driver. Global logistics has become more important as world-class rivals place a greater emphasis on cost reduction. The companies understood that lowering logistical costs would help them achieve and maintain a competitive edge. To successfully manage logistics processes, the whole cost notion is critical. Rather of concentrating on each function separately, the organization's objective should be to minimize the entire cost of logistical activities. Reducing expenses in one area, such as transportation, may increase inventory carrying costs
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by requiring more inventories to cover longer travel durations or to compensate for higher transit time uncertainty. (Lambert, et al., 2004).
According to Balachandran (2004), logistics plays a significant role in one's effectiveness. A vehicle manufacturer can only meet his production schedule provided the essential components are not out of stock at any moment. A car manufacturer uses over 4,000 parts that are purchased from far-flung locations, even across continents. The Just-in-Time (JIT) system is the most cost-effective of the numerous options tested, as inventory carrying costs are lowered to zero. Logistics is one of the systems that must be in place in order for this to happen.
One of the primary causes for the cost variations is that logistics arrangements fluctuate considerably from one firm to the next and from one sector to the next.
Channels can be short (i.e., highly direct) or lengthy (i.e., very indirect) (i.e. have many intermediate stocking points).
Also, channels may be operated by manufacturers, retailers or as is now becoming increasingly common by specialist third party logistics (3PL) distribution companies.
For instance cement is a low‐cost product (as well as being a very bulky one) so relative costs of its logistics are very high. Spirits (whisky, gin etc.) are very high value products, so the relative logistics costs very low.
Logistics offers companies a competitive advantage, can yield cost savings that greater product variety requires improved logistics, also improvement in distribution efficiency are possible due to information technology. Due to these facts, greater emphasis is being placed on Logistics as per Kotler.
Logistics may be the best source of competitive advantage for a company because it is less easily duplicated than other elements of the marketing mix: product, price, and promotion. Consider, for example, forming close, ongoing relationships with carriers or logistics service providers can help give the firm a distinct competitive advantage in speed to the customer, reliability, availability, or other customer service factors.
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It is only in the recent past that business organizations have come to recognize the vital impact that logistics management can have in the achievement of competitive advantage. The source of competitive advantage is found; in the ability of the organization to differentiate itself, in the eyes of the customer, from its competitors, and by operating at a lower cost and hence at a greater profit.
The entirety of the company's logistical expenses, such as inventory, transportation, and information/order processing, may be considered as customer service expenditures. Logistics management aims to improve customer service levels by defining a system strategy while preserving cost tradeoffs across various operations, each of which is a cost problem in and of itself. According to Lambert et al. (2004), the goal is to offer the organization the lowest total logistical costs possible, assuming a certain degree of customer service.
Logistics management that is well-executed may improve quality and boost a company's competitiveness in both home and international markets. Effective logistics management has lately been recognized as a major potential to improve both the profitability and competitive performance of businesses in this regard. Even companies who had previously embraced the "marketing idea" were rethinking what it meant to be customer-centric. The tendency of a strong customer focus is still very strong today. The marketing idea is a marketing management theory that states that attaining organizational goals requires identifying target market requirements and desires and delivering required satisfactions more effectively and efficiently than rivals. Due to the rapid globalization process, logistics play a critical and differentiating role.
Many firms have found it cost-effective to transfer the whole logistical duty to specialist logistics companies, as Balachandran (2004) pointed out. In recent years, logistics has grown in importance as a service industry. Retailers such as Wal-Mart, who buy items from hundreds of vendors throughout the world in preparation for holiday sales, may not be able to manage logistics themselves and must rely on third parties. Even if they handle it themselves, they will manage it via a separate division since it requires information and choices that are distinct from procurement and retailing.
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In India, the primary infrastructure necessary for transferring products from one location to another includes the active responsibilities of highways, the road freight sector, railroads, ports, and ships (together referred to as "Macro Logistics"), all of which are predominantly overseen or regulated by the government. According to studies, India's overall logistics expenses account for about 10% of the country's gross national product (GNP), with transportation accounting for nearly 40% of that.
The cost is estimated to be approximately 6% of GNP in the United States.
The relative importance of these various aspects of logistics may differ between one company and another. The choice of transport mode could, for example, be an initial strategic decision and a subsequent tactical decision for the same company. It might also be a strategic decision for a company that is setting up a new global logistics operation but might be a tactical decision for another company that is principally a supplier to a locally based market and only occasionally experts over long distances.
Basically, logistics activities can be count as follows;
• Transportation,
• warehousing,
• Material handling,
• Protective packaging,
• Inventory control,
• order processing,
• Marketing, forecasting,
• Customer service...
These activities can be expanded as the sector growing and changes in the globalization process. From the above classification, transportation is the most important activity in logistics.
Logistics costs are consist of expenses including all logistics processes, starting from procurement of goods to warehousing, transportation, and information technologies.
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When the logistics costs of companies that produce consumer goods are approximately 5% of their revenue, it is 20% in manufacturing companies. In other sectors and in small and medium-sized entrepreneurs (SME) this rate exceeds 20%.
By designing, managing, and redeveloping the logistics processes, the logistics costs of the companies can be minimized.
Inventory management has an important role in both logistics activities and warehousing. Another important activity is handling which is the transportation of goods over short distances. Handling is a process starting with transportation of goods to depot, stuffing, and then transportation of goods to the truck for loading.
Such short-distance transportation is important for goods’ quality. Forklifts and cranes are basic stuffing vehicles and within the usage of these basic vehicles, there is a requirement for qualified human resources.
Order processing is also an important logistics activity. It consists of receipt of the orders, tracking of the process, and enable the delivery on time for customer satisfaction. Recently order processing is moved on internet. Within new information technologies and systems, orders can be taken both by telephone and via the internet and there is an opportunity for tracking and in this way, distribution costs can be minimized.
Packing has an important role in this process. When the goods are transported from one place to another, one of the most important issues that influence the physical statement and characteristic of a good is the packaging. Packaging is performed by taking the transportation mode and characteristics of a good into consideration. The selection also influences the packaging costs.
Procurement is also important in logistics services. There is a strong relation between transportation cost and the place that the raw material provided, and procurement of required goods. In this context, within efficient planning, more than one supplier can be used, more qualified material can be provided for companies, risk of working with one supplier can be minimized.
There is a relationship between these logistics activities. Each activity can influence the other and can increase logistics costs alone. Therefore, all these activities should be managed due to companies’ needs. This process can be performed by logistics
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management. In this process, an appropriate logistics management system should be selected to increase productivity and competitive advantage.
Principle and functions of logistics:
In logistics activities, some principles are generally the same in the military field and the production sector. These principles are used as a guide in the realization and planning of logistics services. The logistics principles are examined by MEB (2011) under eight headings. These are:
1-Standardization: Logistics services to be used in supported systems should be standard. It is essential to catch international standards in standard services, materials, procedures, and applications. Containers, handling elements, railways, information technology, etc. standardization of necessary logistics elements helps firms to capture competition in the globalization process. The targets such as standardization, joint work, manageability should be primary targets.
2- Being Affordable: In today's global economy, resources are diminishing, and demand is increasing and need are becoming more diversified. The economic principle is that the cost-resource balance should be well-adjusted with the least expenditure. Firms will save both time and money when they are sensitive to priorities and the allocation of resources.
3- Sufficiency: In the principle of sufficiency, non-plan costs should be avoided from affordability and sustainability instead of the excess value of the excess stock.
4- Elasticity: Logistics organizations should be structured in such a way as to fit well with today's consumer behaviour, tasks, concepts and concepts.
5- Simplicity: Firms should avoid complicated occurrences in both practice and planning and should be based on sustainability in all departments. Simplicity improves efficiency and makes it easier to access information.
6- Traceability: It is necessary for the early detection and resolution of possible problems that can be monitored in real-time by real-time monitoring of the amounts, situations, production times, and locations of products used in all departments with the help of information technology and electronic systems.
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7- Coordination: The provision of logistic support activities depends on the coordination of all the units in the logistics. The coordination between logistics performers and planners and customers must.
8- Planning: The aim of logistics is to determine the difference between the plans and applications in the processes and make improvements in the process.
The information given in the definition of logistics indicates that logistics is a multitude of functions. There are two different functions of the logistics as primary and auxiliary functions:
• Basic function
• Production Planning
• Material and inventory management,
• Purchasing,
• Customer service,
• Storage and handling,
• Distribution and transportation
• Auxiliary functions
• Packaging
• Order processing, handling
• Knowledge management
• Demand forecasting/planning
• After-sales service
• Factory/warehouse location selection
• Purchasing, customs clearance
• Waste parts management The role of logistics on trade:
There are so many dimensions for logistics. It is measuring and summarizing performance throughout countries is challenging. Examining the time and costs related to logistics procedures port processing, customs clearance, transport, and the like is a good start, and in many instances, these statistics are readily available.
However, even when complete, this information cannot be without problems aggregated into a single, constant cross-country dataset, due to the fact of structural differences in nations provides chains.
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Even more important, many indispensable elements of precise logistics such as technique transparency and carrier quality, predictability, and reliability cannot be assessed by the use of solely time and value information. The modern generation of global change is one of the increasingly complex interactions between people, firms, and organizations. Supply chains pass nations and regions. Trade has to turn out to be a 24/7 commercial enterprise and desirable overall performance in trade requires connectivity along now not only roads, rail, and sea, however in telecommunications, monetary markets, and information-processing. Having inefficient or insufficient systems of transportation, logistics, and trade-related infrastructure can severely obstruct a countries' potential to compete on an international scale.
This growing complexity has serious implications for the world's poor, who frequently are disproportionately disconnected from global, regional, or even nearby markets. Poverty is frequently focused in geographic areas that are poorly related to the active monetary center, inside and between countries.
These pockets of poverty may be close to dynamic, urban markets, for example, however economically remoted from them. They frequently lack correct connections to financial, economic, information, and infrastructure networks, too. Firms and communities in these areas pass over opportunities to enhance skilled, competitive workforces; they are not built-in in international manufacturing chains and are much less capable to diversify their merchandise and skills.
2.10.1 Logistics performance:
Logistics and transport are turning into an increasing number of essential in global trade relations. Logistic Performance Index (LPI) analyses the differences between countries, offering a customary image of customs procedures, logistics charges, and the pleasant of the infrastructure vital for overland and maritime transport. At the same time, and as a result of the non-stop expansion procedures it has undergone, the European Union (EU) is a very fascinating case to learn about how the reforms that decorate logistics overall performance have affected exports (Martí et al., 2014).
In trade, the competitiveness of logistics activities is rising from day to day, that's why logistics is one of the key elements of the trade. Researchers as (Hausman et al., 2013) and (Martí et al., 2014) showed in their studies that the logistics performance index inuenced inter-country trade. When we examine these studies, the LPI
