What is Logistics and Supply Chain Management?

What is the difference between Logistics and Supply Chain Management? Many people use 2 terms interchangeably but what is the relationship between both terms? Here you will learn about the meanings of most common logistics and scm terms.

1. What is the Difference Between Logistics and Supply Chain Management?
The difference between logistics and supply chain management is as below:

"Logistics typically refers to activities that occur within the boundaries of a single organization and supply chains refer to networks of companies that work together and coordinate their actions to deliver a product to market. Also, traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply Chain Management (SCM) acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service" - from Essential of Supply Chain Management by Michael Hugos

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2. What is Logistics?
We will dig deeper to see more simple meaning of logistics as below,
"Logistics is about getting the right product, to the right customer, in the right quantity, in the right condition, at the right place, at the right time, and at the right cost (the seven Rs of Logistics)" - from Supply Chain Management: A Logistics Perspective By John J. Coyle et al

In the past, various logistics tasks are under different departments but now they are under "logistics department" and report to the same logistics head as below,


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We would like to point out that the word "logistics" ends with the "s". Without the "s" (logistic), it means a kind of mathematical function showing exponential growth.

3. What is Logistics Management?
We will also explore more deeply about logistics management as below,
"Logistics Management deals with efficient and effective management of day-to-day activity in producing the company’' s finished goods and services" - from Integral Logistics Management by Paul Schönsleben
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4. What is the Difference between Inbound and Outbound Logistics?
Another interesting (but less common) term is inbound and outbound logistics. Let's find out its meaning as below,
"Inbound Logistics refers to movement of goods and raw materials from suppliers to your company. In contrast, Outbound Logistics refers to movement of finished goods from your company to customers"

To illustrate this term, we make a small graphic as below,

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As you can see, purchasing and warehouse function communicates with suppliers and sometimes called "supplier facing function". Production planning and inventory control function is the center point of this chart. Customer service and transport function communicates with customers and sometimes called "customer facing function.

5. What is Transport and Logistics?
The term "transport and logistics is broadly used to refer to one type of industry classification as below,
"Transport and Logistics refers to 2 types of activities, namely, transportation (traditional services such as air/sea/land transportation, warehousing, customs clearance) and logistics (value-added services which including information technology and consulting)"
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6. What is International Logistics and Global Logistics
International logistics, global logistics and global supply chain is one of the most ambiguous group of terms out there. They are used interchangeably and often referred to international production and transportation activities. However, more concise definition of international logistics or global logistics is as below,
"International Logistics (also known as Global Logistics) focuses on how to manage and control overseas activities effectively as a single business unit. Therefore, company should try to harness the value of overseas product, services, marketing, R&D and turn them into competitive advantage"
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7. What is 3PL or Third Party Logistics?
The concept of Thrid Party Logistics or 3PL appeared on the scene in 1980s as the way to reduce costs and improve services which can be defined as below,
"3PL or Third Party Logistics refers to the outsourcing of logistics activities, ranging from a specific task such as trucking or marine cargo transport to broader activities serving the whole supply chain such as inventory management, order processing and consulting."
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In the past, many 3PL providers didn't have adequate expertise to operate in complex supply chain structure and process. The result was the inception of another concept.

8. What is 4PL or Fourth Party Logistics?
Fourth Party Logistcs or 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,
"4PL or Fourth Party Logistics refers to a party who works on behalf of client to do contract negotiations and management of performance of 3PL providers including the design of the whole supply chain network and control of day-to-day operations"
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You may wonder if a 4PL provider is really needed. According to the research by Nezar Al-Mugren from the University of Wisconsin-Stout, top 3 reasons why customers would like to use 4PL providers are as below,

- Lack of technology to integrate supply chain process

- The increase in operating complexities

- The sharp increase in global business operations

9. What is Supply Chain?
We know for the fact that supply chain refers to "network" but let's have a closer look at it as below,
"Supply Chain is the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer" - from Logistics and Supply Chain Management by Martin Christopher
10. What is Supply Chain Management?
Each researcher defines supply chain management differently. However, we would like to provide the simple supply chain management definition as below,

"Supply chain management (SCM) refers to the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served" - from Essential of Supply Chain Management by Michael Hugos

To dig deeper, supply chain management has 6 important components as below,

- It's a Network: Many companies have the department that controls various activities within the supply chain. So people are led to believe that SCM is a "function" which it's not. Supply Chain is actually a "network" consists of many players as below,

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A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer (it's more complex in real world but simple illustration serves the purpose).

The word "management" can be explained briefly as "planning, implementing, controlling". Supply Chain Management is then the planning, implementing and controlling of the networks.

- Information Must Flow: Another important attribute of supply chain management is the flow of material, information and finance (money). Even thought there are 3 types of flow, the most important one is information flow aka information sharing. Let's see the example of this through the simplified version of bullwhip effect as below,

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When demand data is not shared, each player in the same supply chain must make some sort of speculation. According to the above graphic, retailer has a demand of 100 units but each player tends to keep stock more and more at every step of the way. This results in higher cost for everyone in the same supply chain.

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When information is shared from retailer down to supplier, everyone doesn't have to keep stock that much. The result is lower cost for everyone.

- Coordination is Essential: Information sharing requires certain degree of "coordination" (it's also referred to as collaboration or integration in scholarly articles). Do you wonder when people started working together as a supply chain network? In 1984, companies in the apparel business worked together to reduce overall lead-time. In 1995, companies in automotive industry used Electronic Data Interchange to share information. So, working as a "chain" is the real world practice.

- Avoid Conflicting Objectives: Working as a supply chain network requires the same objective but this is often not the case (even with someone in the same company)."Conflicting Objectives" is the term used the describe the situation when each function wants something that won't go well together. For example, purchasing people always place the orders to the cheapest vendors (with a very long lead-time) but production people needs material more quickly.

To avoid conflicting objectives, you need to decide if you want to adopt time-based strategy, low cost strategy or differentiation strategy. A clear direction is needed so people can make the decisions accordingly.

- Balance Cost/Service: The concept of Cost/Service Trade-off appeared as early as in 1985 but it seems that people really don't get it.

When you want to improve service, cost goes up. When you want to cut cost, service suffers. It's like a "seesaw", the best way you can do is to try to balance both sides.

Real world example is that a "new boss" ask you to cut cost by 10%, improve service level by 15%, double inventory turns and so on. If you really understand cost/service trade-off concept, you will agree that you can't win them all. The most appropriate way to handle this is to prioritize your KPIs.

- Foster Long-term Relationship: To work as the same "supply chain team", long-term relationship is a key. Otherwise, you're just a separate company with different strategy/agenda. So academia keeps preaching about the importance of relationship building, but is not for everyone.

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Since there are too many suppliers to deal with, portfolio matrix is often used to prioritize the relationship building. Focus your time and energy to create long-term relationship with suppliers of key products and items with limited source of supply because these are people who can make or break your supply chain.