Because logistics focuses on managing and filling the customer’s order it cuts across the borders of
many different business functions.
So it is very important that we understand how logistics interacts with those other roles within the
Let’s look at four typical areas that require a degree of communication and coordination.
First and foremost let’s consider marketing because both activities directly interact with the customer.
Logistics and marketing go hand in hand.
It is very difficult to talk about one without talking about the other marketing professionals often
talk about the four piece of marketing.
So we definitely went to take a quick look at each of those and how they impact logistics.
Price is the first area in the marketing mix.
Your company often offers a price discount to your customers for purchasing in higher quantities.
The more the customer buys the lower is the cost per unit.
Logistics professionals can work closely with the marketing department to align those quantity discounts
with full truckloads so that delivery costs can be held down.
The second piece is product the physical attributes size weight shape and packaging.
They also play an important role in determining how to fill that truck at the lowest total transportation
cost marketing people work closely on new product development projects and should always have their
logistics preferences in mind.
Next lets consider promotion when sales and promotions are planned well in advance and closely coordinated
Your company can ensure that there is adequate supply of your product to meet forecasted customer demand.
And should the sales campaign exceed our expectations.
It is the logistics arm that will be asked to respond with quick delivery procedures.
Certainly marketing and logistics must work very closely for any upcoming product promotion.
Our last marketing area is place.
It is the marketing people who primarily influence whether a product is sold through a wholesaler or
directly to retailers or more and more common today directly to the customer through online sales.
These decisions about the marketing channel must align with the capabilities of your distribution network.
In short are your warehouses and distribution centers and transportation routes in place to support
these channel decisions.
Next consider the manufacturing or operations part of your company.
Logistics connects with operations and the movement of materials and finished products.
Correct quantities of raw materials and components must be delivered to the factory at the right time
in order to produce the products that are then delivered to the customer.
Both these critical deliveries are of course the function of logistics.
And again if I can coordinate factory orders into full truck loads I can help to reduce my overall logistics
This is not always an easy thing to do because more than anything else the factory manager is trying
to smooth out his operations by minimizing machine set ups with longer production runs.
Both these considerations impact my inventory levels before at an after the factory these considerations
about quantity and timing of delivery are also influenced by the purchasing function.
In fact purchasing is so important to Operation success in many small and mid-sized companies the procurement
team works directly for the factory manager even in larger organizations.
Some purchases are dedicated to the plant level where suppliers are located also greatly impacts the
logistics team in that local suppliers may deliver for you but items sourced globally have to be carefully
managed through a much longer transportation process.
So clearly logistics must coordinate very carefully with purchasing regardless of who is doing the buying.
Lastly the finance area is becoming increasingly important nowadays for effective company processes
and logistics finance folks are interested in return on investment and return on net assets measurements.
If you own your own fleet of trucks our network of warehouses and distribution centers clearly how the
logistics folks operate those physical assets has a big impact on the company’s financial performance.
If the same results can be attained by more efficient processes allowing fewer trucks and less warehouses
the entire asset base is reduced finance is also interested in costs and efficient logistics operations
can lower inventory and thus lower costs throughout the entire organization.
And of course finance is interested in revenues and this is directly related to the customer service
level that marketing and logistics people achieve together because of how much logistics can impact
these financial measures.
Finance managers are becoming more and more knowledgeable about logistics activities.
On the other hand because investments in logistics must be financially justified.
Logistics managers are becoming more and more knowledgeable about company financial parameters.
So I think you can see that the logistics function cannot stand alone within the organization.
Your company success is very dependent upon how well logistics efforts are coordinated with marketing
operations purchasing and finance and because they do cut across all these borders logistics managers
should be the ones to drive the coordination effort.
Initiating this type of interaction and integration is an important step towards truly understanding
your logistics function.
I read a managerial book a few years ago titled The greatest management principle in the world.
What is the greatest principle.
What gets rewarded gets done.
In short reward someone for a particular behavior and they will happily and quite efficiently repeat
that behavior over and over again.
This is a pretty good principle for effective management.
But interestingly enough I also think this is the number one obstacle to coordination within your logistics
network and along your supply chain.
Let me give you an example if I linked my transportation manager’s compensation to the average transportation
cost per unit he will be highly motivated to ship everything in full truckloads to reach that incentive.
This may not be in the best interests of my company however he will force full truckloads of products
into the warehouses and drive up inventory costs for holding unneeded finished goods.
On the other side of that same coin he may hold products at the distribution center or warehouse until
the truck is full.
Causing stock outs at the retailer and lost sales when customers by someone else’s product.
In short I am rewarding the wrong behavior the concept of meeting your incentives regardless of the
impact on the company’s overall performance is called local optimization when rewarding someone for
It must be a reward for reducing overall cost.
Logistics managers must be rewarded for reducing overall supply chain costs not just the cost of their
Rewards must be coordinated with the company’s overall strategies and goals and corporate level measurements.
I actually worked for a company that failed to recognize this when they put an employee bonus system
Everyone in the company worked very hard to meet their quarterly performance goals and they earned enough
to make new car payments with just their bonus money.
Even there in the business quarters that the company was not making a profit the company forgot to tie
the bonus to the corporate profit calculation.
Needless to say that system did not last long.
Also needless to say the employees were very upset when the new bonus system was cancelled after a couple
A second obstacle to effective coordination is lack of information sharing.
Let’s use a straightforward example of a sales promotion.
If the retailer plans ahead for a sale he will of course order more so that he has enough product to
meet projected demand for the sale items.
If he does not let the manufacturer know about the sales event the manufacturer may believe actual demand
is increased especially if several stores planned to have similar items on sale at the same time like
during a holiday weekend.
If the manufacturer is not informed factories and suppliers alike will increase production and build
inventory that is not needed.
This large change in orders can cause great inefficiencies in the supply chain and the logistics system
lack of information sharing leads to a lack of visibility into the actual supply chain activities.
And this is our third obstacle to coordination different parts of your supply chain will react to the
current situation as in the previous example.
Rather than trying to find the root causes of what is happening understanding the entire logistics system
and the order fulfillment process is key to managing your business as an integrated system.
The key to achieving the coordination is to align goals and incentives for every member of my logistics
network and my supply chain members are rewarded for instance for reducing total supply chain costs.
Here’s an example I want to make sure I have enough product available to meet any surge in demand.
But because of their high value holding finished goods amatory is very expensive for me.
If I can have two of my key suppliers hold extra inventory of their components and deliver to me just
in time I can capture those additional revenues without increasing my costs.
Pretty good deal for me but not such a good deal for those two suppliers who now have the added cost
of holding their own extra inventory and processing Russia orders from me.
This is a problem.
So what’s the solution.
The concept is called cost savings sharing and it is a key ingredient to optimizing your supply chain.
I take some of the profit from that extra revenue and I share it with those suppliers for those extra
components that were expedited to me.
Perhaps I pay the supplier a higher price one that covers his additional expenses and gives him a little
extra profit rewarding those suppliers allows you to gain additional revenues without excessive costs
and in many cases allows sales that might otherwise have been completely lost.
You are partnering for success.
You are optimizing the system instead of just one part of the system.
How is your reward system.
I always start with a look from the perspective of inventory performance measurements incentivize managers
to decrease inventory or Zimmerman to actually increasing.
As a result of what is getting rewarded and I look at how well information about inventory levels is
communicated with my key partners.
These attributes lead to good coordination practices and really good logistics systems.